Krugman’s blog, 5/20/13

There were five posts yesterday.  The first was “German Wages and Portuguese Competitiveness (A Bit Wonkish):”

There’s a three-cornered debate among Ryan Avent, Tyler Cowen, and Karl Smith over the extent to which a more expansionary ECB policy would help the European periphery.

I very much agree with Avent and Smith that Cowen, who worries that such a policy would largely lead to inflation in Germany rather than a boom in Portugal, is completely missing the point; that’s a feature, not a bug.

But what really puzzles me about Cowen’s exposition here is his misplaced focus on the extent to which Portugal and Germany are in direct competition with each other, or to which Germany is Portugal’s main export market. This is very nearly irrelevant — because the point is that Germany and Portugal, for better or (mainly) worse, now share a currency, and what happens in Germany very much affects the value of that currency relative to other currencies.

Cowen writes that rising wages in Germany

solves (at best) only one of the core problems of the eurozone, namely incorrect relative prices between Portugal and Germany. It helps less with the “Portuguese nominal wages are too high” problem …

OK, stop right there. When you say “Portuguese nominal wages are too high”, you have to explain, too high relative to what? As Rudi Dornbusch always used to say, it takes two nominals to make a real.

And the answer, clearly, is “too high relative to German wages”. What else could it be?

But, you say, Portugal doesn’t compete that much with Germany. Ahem. Suppose that I could wave a magic wand (or play a few notes on a a Magic Flute) and suddenly increase all German wages by 20 percent. What do you think would happen to the value of the euro against the dollar and other currencies? It would drop a lot, yes? And Portuguese exports would become a lot more competitive everywhere, including non-German and indeed non-Euro destinations.

I guess I thought this was obvious. Apparently not.

Again, as Ryan says, the crucial difference between German/ Portuguese economic relations and, say, US/ El Salvador (whoops: some central American countries have dollarized. But that was their choice, not part of a grand project like the euro) relations is that Germany and Portugal share a currency. This creates obligations for Germany, whether it likes them or not.

The next post of the day was “Macoeconomic Machismo:”

Atrios, weighing in on the Kinsley Kontroversy, suggests that the evident urge to make Someone Suffer — Someone Else, of course — reflects sadism. But I don’t think that’s right. Lack of compassion, sure; an inability to imagine what it must be like for someone less fortunate than oneself and one’s friends, definitely. But I think that the linked Scott Lemieux post, which equates the austerian fixation on stagflation with the neocon fixation on Munich, is much closer to the mark.

It was obvious during the runup to the Iraq war that what was going on in the minds of many hawks — and not just the neocons — was not so much a deep desire to drop lots of bombs and kill lots of people (although they were OK with that) as a deep desire to be seen as people who were willing to Do What Has to be Done. Men who have never risked, well, anything relished the chance to look in the mirror and see Winston Churchill looking back.

Actually, I suspect that even the torture thing had less to do with sadism than with the desire to look tough.

And the austerian impulse is pretty much the same thing, except that in this case the mild-mannered pundits want to look in the mirror and see Paul Volcker.

Much of the problem in trying to stop the march to war was precisely the fear of many pundits that they would be seen as weak and, above all, not Serious if they objected. Austerity has been very much the same thing — and again, it’s not just the right-wingers who are afflicted.

Let me illustrate that point with two parallel diagnoses of economic crisis, 78 years apart. The first is from John Maynard Keynes, The Great Slump of 1930; the second from Barack Obama’s first inaugural, in January 2009. Keynes:

This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.

Obama:

We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.

Do you see where it goes wrong? Most of the way through, Obama is getting it right: this is a “colossal muddle”, a technical problem that needs fixing. But then he suddenly swerves into the language of Very Serious People, talking about the need to make unpleasant decisions (which is always there, but if anything less so in a depression).

I was very upset about this at the time, but not upset enough — for there, right at the beginning, was the austerian temptation, adulterating the message of the man who should have been that temptation’s fiercest opponent.

So if you like, the problem is Seriousness rather than sadism. On foreign policy, it’s always 1938; on economic policy, it’s always 1979. And the colossal muddle goes on.

The third post yesterday was “Dead Ingot Bounce.”  (That phrase does make me chortle.)

A couple of weeks ago I mentioned that I had been getting some grief from goldbugs, who were reveling in the fact that gold went up some after I wrote about its fading appeal. I expressed skepticism — as you always should after any short-term price movement, especially in an asset with as much emotional freight as gold — and suggested that it might be a dead ingot bounce. Hmmm:

Yes, I know gold had a huge rise in previous years. I also know that there may be more bounces ahead. But mostly I just want to claim the phrase …

Fourth up yesterday was “Where Are The Deficit Celebrations?”:

For three years and more Beltway politics has been all about the deficit. Urgent action was needed to avert crisis. A Grand Bargain absolutely had to be reached. Fix the Debt, now now now!

So where are the celebrations now that the debt issue looks, if not solved, at least greatly mitigated? And it’s not just recovering revenues: health costs, the biggest driver of long-run spending, have slowed dramatically.

What we’re getting from the deficit scolds, however, are at best grudging admissions that things may look a bit less dire — if not expressions of regret that the public seems insufficiently alarmed.

Jamelle Bouie gets at a large part of it by noting what was obvious all along: for many deficit scolds, it was never really about the debt, it was about using deficits as a way to attack the social safety net. Deficits may have come down, but not the way they were supposed to — hey, we were supposed to be kicking 65 and 66 year-olds off Medicare, not doing something so goody-goody as managing costs better.

There is, however, a secondary factor: think about the personal career incentives of the professional deficit scolds. You’re Bowles/Simpson, with a lucrative and ego-satisfying business of going around the country delivering ominous talks about The Deficit; you’re an employee of one of the many Pete Peterson front groups; and now, all of a sudden, the deficit is receding, and you had nothing to do with it. It’s a disaster!

And so the deficit progress must be minimized and bad-mouthed.

Of course.  Because it makes it harder to punish the olds, the poors and the browns…  The last post of the day was “The Theory of Interstellar Finance:”

The theory of interstellar trade is a well-understood topic, with an extensive literature consisting of one paper (pdf) I wrote in 1978. Interstellar finance, however, is less well covered.

That’s all about to change, however. I’m reading an advance copy of Charlie Stross’s Neptune’s Brood. (Hey, I have connections!) And it is the best thing by far written on the subject to date, partly because it is, as far as I know, the only thing written on the subject to date.

It’s also a fantastic novel.

Thanks for the tip!  I love Stross’ work.

Krugman’s blog, 5/19/13

There were two posts yesterday.  The first was “The Mythical 70s:”

Matt O’Brien is probably right to suggest that Michael Kinsley’s problems — and those of quite a few other people, some of whom have real influence on policy — is that they’re still living in the 1970s. I do, however, resent that thing about 60-year-old men …

But it’s actually even worse than Matt says. For the 1970s such people remember as a cautionary tale bears little resemblance to the 1970s that actually happened.

In elite mythology, the origins of the crisis of the 70s, like the supposed origins of our current crisis, lay in excess: too much debt, too much coddling of those slovenly proles via a strong welfare state. The suffering of 1979-82 was necessary payback.

None of that is remotely true.

There was no deficit problem: government debt was low and stable or falling as a share of GDP during the 70s. Rising welfare rolls may have been a big political problem, but a runaway welfare state more broadly just wasn’t an issue — hey, these days right-wingers complaining about a nation of takers tend to use the low-dependency 70s as a baseline.

What we did have was a wage-price spiral: workers demanding large wage increases (those were the days when workers actually could make demands) because they expected lots of inflation, firms raising prices because of rising costs, all exacerbated by big oil shocks. It was mainly a case of self-fulfilling expectations, and the problem was to break the cycle.

So why did we need a terrible recession? Not to pay for our past sins, but simply as a way to cool the action. Someone — I’m pretty sure it was Martin Baily — described the inflation problem as being like what happens when everyone at a football game stands up to see the action better, and the result is that everyone is uncomfortable but nobody actually gets a better view. And the recession was, in effect, stopping the game until everyone was seated again.

The difference, of course, was that this timeout destroyed millions of jobs and wasted trillions of dollars.

Was there a better way? Ideally, we should have been able to get all the relevant parties in a room and say, look, this inflation has to stop; you workers, reduce your wage demands, you businesses, cancel your price increases, and for our part, we agree to stop printing money so the whole thing is over. That way, you’d get price stability without the recession. And in some small, cohesive countries that is more or less what happened. (Check out the Israeli stabilization of 1985).

But America wasn’t like that, and the decision was made to do it the hard, brutal way. This was not a policy triumph! It was, in a way, a confession of despair.

It worked on the inflation front, although some of the other myths about all that are just as false as the myths about the 1970s. No, America didn’t return to vigorous productivity growth — that didn’t happen until the mid-1990s. 60-year-old men should remember that a decade after the Volcker disinflation we were still very much in a national funk; remember the old joke that the Cold War was over, and Japan won?

So it would be bad enough if we were basing policy today on lessons from the 70s. It’s even worse that we’re basing policy today on a mythical 70s that never was.

The second post of the day was “Inequality and Growth, Discussed:”

I’ve been in transit all day, so no column in tomorrow’s paper. Incidentally, I saw evidence of impressive investment in infrastructure while away — unfortunately, by beavers, not state and local governments:

Anyway, Tony Atkinson and I will be having a dialogue on inequality and growth tomorrow evening at CUNY, moderated by Chrystia Freeland, from 6:30 to 8; livestream here. Chrystia will be taking questions at #GCinequality.

Krugman’s blog, 5/17/13

There were four posts yesterday.  The first was “Too Much Talk About Liquidity:”

Antonio Fatas is annoyed at Gillian Tett, who talks to the I-see-bubbles crowd and assumes that they have The Truth — namely, that those crazy central banks are flooding the world with liquidity, driving asset prices to crazy levels, and it will all end in terrible grief. Pretty much the same discussion we’ve been having about the armageddon hedgies.

As Fatas says, it’s hard to see what exactly in the data supports this view. Short-term interest rates are near zero because the economy is so depressed, and will stay that way for a long time. Long-term rates are low because people, rightly, expect short-term rates to stay low for a long time. What about stocks? Here’s profits versus the S&P 500:

Does this shout “bubble” to you?

Now, there are some real puzzles here. Why have profits been so strong in a weak economy? Why, with profits so high, don’t businesses find reason to invest more (equipment investment is actually fairly strong, but construction remains weak). (For the seriously wonkish, why do average and marginal q seem to be so different?)

But these seem to be real-side puzzles, not monetary/financial puzzles. I don’t see anything in the data that has the “signature” of what you’d expect if the big problem was that Ben Bernanke is flooding the market with artificial liquidity that has nowhere to go.

The second post of the day was “That Hideous Strength:”

The FT has an interesting article on problems with Irish GNP (not GDP) accounting; essentially, measured Irish income is being inflated by foreign companies with no real activity there that nonetheless find ways to make profits materialize in a low-tax jurisdiction. We sort of knew this was happening — that, for example, a lot of the apparent rise in productivity was just a shift to pharma companies that produce a lot of reported value-added but add little to the Irish economy. But the new ESRI report suggests that the problem is bigger than realized.

However, this passage got me:

The ESRI research raises question marks over the strength of Ireland’s recovery, which has surprised many foreign observers in light of the severe economic crisis the country experienced in 2008.

Who are these surprised foreign observers? My impression is that Ireland has been proclaimed a success story again, and again, and again, only to have the narrative slink away in the face of disappointing experience. And if we look at jobs, which is not subject to these accounting issues, here’s what the “strength of Ireland’s recovery” looks like:

A few more such strong recoveries and there will be no jobs left at all.

The third post of the day was “That 90s Show:”

I picked a good week to be away — and I am still away, mostly, although playing a bit of hooky on the notebook right now. For it has been the week of OBAMA SCANDALS, nonstop.

Except it seems that there weren’t actually any scandals, just the usual confusion and low-level mistakes that happen all the time, in any administration.

Does the evaporation of the scandals matter? I don’t know. Unfortunately, I remember the early Clinton years, when ridiculous stuff — restructuring at the White House travel office, for God’s sake, and a money-losing land deal — led to years of front-page headlines, endless investigations,and nothing at all in the form of proven Clinton wrongdoing. If the press decide that scandals are going to be the topic, the absence of actual scandals may not matter.

Oh, and the ongoing disaster of economic policy? Boooring.

He ended the day with “Friday Night Music:  Suzanne Vega, Gypsy:”

Something beautiful for a lovely weekend:

Suzanne Vega, “Gypsy,” Live on Soundcheck

 

Krugman’s blog, 5/16/13

There were three posts yesterday.  The first was “Who You Gonna Bet On?”:

OK, this is different: Jesse Eisinger of Propublica — Propublica! — defending those poor maligned hedge fund managers against the ridicule of macroeconomists.

And it’s true: we’ve been having a lot of fun over those dire pronouncements that quantitative easing will drain our vitalpreecious bodily fluids, doom western civilization, and all that.What’s odd, however, is that although Eisinger’s piece is titled “Why fund managers may be right about the Fed”, it offers absolutely no analysis to that effect — no channel through which Bernanke’s policies might in fact be a disaster, as opposed to pointing out that the economy hasn’t been doing all that well even though stocks are up.

Eisinger’s main ace in the hole seems to be that economists failed to see the crisis coming:

But what these investors are expressing should trouble all of us: they have almost no confidence in the Federal Reserve or the economics profession. And for good reason.

It’s impressive that the Fed and many economists have successfully predicted the path of interest rates and inflation in the wake of the worst financial crisis in a generation. But neither the central bank nor academicians managed to predict or prevent the crisis in the first place. The failure dwarfs the accomplishment.

I would disagree about the respective importance of failure and accomplishment; I’ve recently argued that it’s just the other way around:

I would argue, however—self-serving as it may sound (I warned about the housing bubble, but had no inkling of how widespread a collapse would follow when it burst)—that the failure to anticipate the crisis was a relatively minor sin. Economies are complicated, ever-changing entities; it was understandable that few economists realized the extent to which short-term lending and securitization of assets such as subprime mortgages had recreated the old risks that deposit insurance and bank regulation were created to control.

I’d argue that what happened next—the way policymakers turned their back on practically everything economists had learned about how to deal with depressions, the way elite opinion seized on anything that could be used to justify austerity—was a much greater sin. The financial crisis of 2008 was a surprise, and happened very fast; but we’ve been stuck in a regime of slow growth and desperately high unemployment for years now. And during all that time policymakers have been ignoring the lessons of theory and history.

Still, in fairness, the fund managers complaining the loudest about Bernanke do seem to be guys who saw the housing bubble and made money by shorting subprime. So they have some right to feel that they have a track record.

But is it the kind of track record that suits them for analyzing monetary policy and macroeconomics? The most famous of the housing shorters, thanks to Michael Lewis, is John Paulson; and, well, Krugman or Paulson: Who you gonna bet on?

The point, I think, is that you can simultaneously fault the Fed and economists in general for failing to see this crisis coming, and ridicule the hedge fund guys for giving advice right now that is both ludicrous and dangerous. And you should.

The second post of the day was “The Smith/Klein/Kalecki Theory of Austerity:”

Noah Smith recently offered an interesting take on the real reasons austerity garners so much support from elites, no matter hw badly it fails in practice. Elites, he argues, see economic distress as an opportunity to push through “reforms” — which basically means changes they want, which may or may not actually serve the interest of promoting economic growth — and oppose any policies that might mitigate crisis without the need for these changes:

I conjecture that “austerians” are concerned that anti-recessionary macro policy will allow a country to “muddle through” a crisis without improving its institutions. In other words, they fear that a successful stimulus would be wasting a good crisis.

…

If people really do think that the danger of stimulus is not that it might fail, but that it might succeed, they need to say so. Only then, I believe, can we have an optimal public discussion about costs and benefits.

As he notes, the day after he wrote that post, Steven Pearlstein of the Washington Post made exactly that argument for austerity.

What Smith didn’t note, somewhat surprisingly, is that his argument is very close to Naomi Klein’s Shock Doctrine, with its argument that elites systematically exploit disasters to push through neoliberal policies even if these policies are essentially irrelevant to the sources of disaster. I have to admit that I was predisposed to dislike Klein’s book when it came out, probably out of professional turf-defending and whatever — but her thesis really helps explain a lot about what’s going on in Europe in particular.

And the lineage goes back even further. Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence. This is pretty close to the argument that we must have austerity, because stimulus might remove the incentive for structural reform that, you guessed it, gives businesses the confidence they need before deigning to produce recovery.

And sure enough, in my inbox this morning I see a piece more or less deploring the early signs of success for Abenomics: Abenomics is working — but it had better not work too well. Because if it works, how will we get structural reform?

So one way to see the drive for austerity is as an application of a sort of reverse Hippocratic oath: “First, do nothing to mitigate harm”. For the people must suffer if neoliberal reforms are to prosper.

The last post of the day was “The Sadomonetarists of Basel:”

The WSJ highlights a speech by Jaime Caruana, general manager of the Bank for International Settlements, warning of the dangers of easy money and the need to raise rates now to avert … something or other. And his views matter, says the Journal:

Mr. Caruana is no disgruntled outvoted hawk on a policy-setting council, trying desperately to set the record straight after being outvoted. Rather, he’s the mouthpiece for a global college of central bankers, almost all of whom find themselves under intense pressure from their national governments to keep things ticking over while they try to repair the economy.

His views also matter for another reason: the BIS is one of the few international financial institutions (some say the only one) to see the financial crisis coming and to issue clear warnings ahead of time.

I guess we can check the record here and see just how prescient the BIS was. What I do recall, however — which the Journal apparently doesn’t — is that the BIS has spent years warning about the dangers of low interest rates. Except that a couple of years back it was telling a completely different story about why we needed to raise rates; you see, the big danger was of imminent inflation:

“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints,” said the BIS, which acts as a central bank for the world’s central banks. “These increased upside risks to inflation call for higher policy rates.”

In fact, inflation is running below target just about everywhere. You might therefore think that the BIS would step back a bit and reconsider both its policy recommendations and the framework it uses to derive those recommendations.

But no. Higher interest rates are always the solution; it’s only the problem they’re supposed to solve that changes.

 

Krugman’s blog, 5/15/13

Just one post yesterday, “About That Debt Crisis? Never Mind:”

Link fixed

OK, another toe dipped in reality. The new CBO numbers are out, and they scream “debt crisis? What debt crisis?” Here’s the actual and projected ratio of federal debt to GDP:

Yes, debt rose substantially in the face of economic crisis — which is what is supposed to happen. But runaway deficits? Not a hint.

Yes, there are longer-term issues of health costs and demographics. As always, however, these have no relevance to what we should be doing now — and it’s far from clear why they should even be a priority for discussion. As I’ve written before, the VSP consensus seems to be that to avoid the possibility of future benefit cuts, we must commit ourselves now now now to … future cuts in benefits.

Why, it’s almost as if the real goal was to make sure that benefits get cut even if the fiscal outlook improves.

Meanwhile, our policy discourse has been dominated for years by what turns out to be a false alarm. To the millions of Americans who are out of work and may never get another job thanks to premature fiscal austerity, the VSPs would like to say, “oopsies!”

Or maybe not even that. I’m happy to report that the Times does place this fiscal news on page 1. But correspondents tell me that at VSP Central, aka The Washington Post — where deficit panic has pervaded the news pages as well as the opinion section — the stunning new deficit report is buried as a small item deep inside the paper.

And Bowles and Simpson, who are now 26 months into their prediction of fiscal crisis within two years, will continue to be treated as revered gurus.

I love it that he always puts Bowles first, so they can be shortened to “BS.”

Krugman’s blog, 5/14/13

Just one short post yesterday, “Austerity in the New York Review of Books:”

I have been spending my time doing my best to take a break from the alleged real world, and will continue doing so for a bit. I should, however, let readers know that my longish-form essay on the great austerity debacle is now up at The New York Review of Books.

 

Krugman’s blog, 5/13/13

One post yesterday, “Which Textbook Is That, Exactly?”:

OK, on the road, and a quick post over coffee.

Ryan Avent, like me, was favorably impressed by the Nick Crafts piece on British policy in the 1930s. I was, however, slightly puzzled, in a tooting-my-own-horn fashion, by the reference — which I missed in Crafts, but was repeated and emphasized by Avent — to the “textbook approach” of raising inflation expectations to escape a liquidity trap.

Um, which textbook is that, exactly? As far as I know, among basic textbooks only Krugman/Wells even talks about the liquidity trap; certainly we were the only one talking about it before 2008. And the whole discussion of inflation expectations and monetary policy in a liquidity trap as a sort of inverted version of the usual credibility problem — in fact, the whole revival of the liquidity trap as a modern concern — dates from this paper (pdf).

This isn’t purely self-promotion (although obviously that’s part of it). I do think that one reason I’ve done pretty well in tracking this ongoing slump is that I’ve been thinking about liquidity trap issues for a very long time, years before almost anyone else.

OK, while I’m wrenching my arm patting myself on the back, here’s Ryan Grim explaining how one critic, in his desperate attempts to create false equivalence, is forced to invent a character named “Paul Krugman” bearing little resemblance to the person of the same name.

 

Krugman’s blog, 5/12/13

Just one post yesterday:  “Nevillenomics:”

Nicholas Crafts has a really interesting piece about UK economic policy in the 1930s. The gist is that monetary policy drove recovery through the expectations channel; the Bank of England managed to credibly promise to be irresponsible, that is, to generate inflation.

But how did they do that? Crafts argues that it was two things: the BoE was not independent, it was just an arm of the Treasury, and the Treasury had a known need to generate some inflation to bring down high debt levels.

This is very closely related to Gauti Eggertsson’s analysis of Japanese policy (pdf) over the same period: there too the lack of central bank independence combined with a fiscal imperative made it possible to change monetary expectations in an unorthodox way, which was exactly what was needed (although they should have skipped the invading Manchuria part).

All of this reinforces the important point that, as I put it early in this crisis, we’ve entered a looking-glass world in which virtue is vice and prudence is folly, and in which doing the responsible thing is a recipe for economic failure.

And it also bodes surprisingly well for Abenomics, which might work in part precisely because of what everyone imagines to be Japan’s biggest problem, its huge public debt.

 

Krugman’s blog, 5/11/13

There were five posts yesterday.  the first was “In Praise of Econowankery:”

Mike Konczal has an interesting piece on the general question of whether wonk-blogging — the practice of putting up fairly analytical data-heavy posts bearing on policy issues directly on the web, rather than going through more traditional publication channels — is a good thing. He puts it in the context of liberal politics, which it mostly (though not entirely) is; but I’d like to think about it more generally as a way in which data and analysis can be brought quickly to bear on policy discussion.

And not to create any unnecessary suspense: I think it’s had an enormously salutary effect.

First of all, what are we talking about here? Obviously the econoblogs — Mark Thoma, Brad DeLong, Konczal himself, Marginal Revolution (although it plays a surprisingly, well, marginal role in the big controversies), Yglesias, and many more. But also some of the more institutional blogs, notably FT Alphaville and Business Insider, and columns by the likes of Martin Wolf. And as a practical matter some official institutions are effectively part of the ongoing blogospheric discussion: the IMF, both through its official blogs and, if truth be told, via its semiannual World Economic Outlook and other publications, is in effect participating in the discussion more or less on Internet time. Working papers from some of the Feds, notably New York and San Francisco, do the same.

The overall effect is that we’re having a conversation in which issues get hashed over with a cycle time of months or even weeks, not the years characteristic of conventional academic discourse. Is that a problem?

OK, first point: many people seem to have a much-idealized vision of the academic process, in which wise and careful referees peer-review papers to make sure that they are rock-solid before they go out. In reality, while many referees do their best, many others have pet peeves and ideological biases that at best greatly delay the publication of important work and at worst make it almost impossible to publish in a refereed journal. Gans and Shepherd wrote about this almost 20 years ago, and the situation has surely not improved.

I’m told by younger colleagues, in particular, that anything bearing on the business cycle that has even a vaguely Keynesian feel can be counted on to encounter a very hostile reception; this creates some big problems of relevance for proper journal publication under current circumstances.

A second point is that events are moving fast, and the long lead times of conventional publication essentially guarantee that it will be irrelevant to current policy issues.

Still, all of this would be cold comfort if wonkblogging was just generating noise and confusion. But from where I sit, the reality has been just the opposite.

Look at one important recent case — no, not Reinhart/Rogoff, but Alesina/Ardagna on expansionary austerity. Now, as it happens the original A/A paper was circulated through relatively “proper” channels: released as an NBER working paper, then published in a conference volume, which means that it was at least lightly refereed. Proper science!

Except that it was all wrong. And how did we find out that it was all wrong? First through critiques posted at the Roosevelt Institute, then through detailed analysis of cases by the IMF. The wonkosphere was a much better,much more reliable source of knowledge than the proper academic literature.

And I would say that in general the quality of economic discussion we’ve been having in recent years is the best I’ve ever seen. Yes, there’s junk economics out there, but when was that not true? And yes, it can be hard for lay readers — or for that matter, it seems, quite a few people with heavy economic credentials — to tell the junk from the real insights; but again, when wasn’t that true? As far as real, insightful, useful discussion of matters economic is concerned, this is actually a golden age.

Of course, these useful insights have been largely ignored by policy makers. But once again, when was that not true?

So wonk on proudly. As Martha Stewart would say, it’s a good thing.

The second post of the day was “Harpooning Ben Bernanke:”

Brad DeLong has the best piece I’ve seen on Bernanke rage among the hedge funders. His point is that the hedgies keep thinking of the Fed as if it were a rogue trader driving prices away from their natural value, like JP Morgan’s London Whale, rather than as a central bank trying to achieve full employment and target inflation. Hence their rage at the failure of bond prices to collapse the way they “should”.

I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied.

What you should be doing is macro analysis, using something like IS-LM — something like what I did here, almost three years ago. (The forecasts have gotten worse since, so the implied long-term rate would be even lower).

But instead of saying that maybe this macro IS-LM stuff has a point, they’re raging against the man with the beard.

The third post of the day was “Inflation Madness:”

One thing I gather from various economic discussions as well as some of the trolls on this blog is that there’s a widespread view that the kind of monetary policy I advocate — which includes a higher inflation target — isn’t just wrong; it’s madness. It is, I am told in no uncertain terms, proof that I am no longer a real economist, if I ever was.

So I guess it’s worth pointing out the long list of respectable economists with similar views. The point is not to argue from authority — it is, instead, to knock down the other side’s attempt to argue from authority, on the grounds that “nobody” believes that this is a good or even legitimate idea.

So, a brief list of well-known economists who have been pro-inflation under circumstances like those we face today:

Greg Mankiw and Ken Rogoff.

Olivier Blanchard, the chief economist of the IMF.

Mike Woodford, arguably our leading macroeconomic theorist.

Lars Svensson, the deputy governor of the RijksbankRiksbank, although on his way out because his colleagues disagree.

Ben Bernanke, back when he was lecturing the Japanese.

If you think this is a terrible idea, that’s your right. But if you imagine that it’s outlandish and somehow uneconomistic, you’re just ignorant.

Next up was “Grant’s Anabasis (More Civil War Obsession):”

Still indulging myself with personal addenda to the Times Disunion blog, and feeding my U.S. Grant obsession. So, at this point in the Vicksburg campaign we’re at the amazing stage where Grant cuts loose from the Mississippi, defeats Confederate forces trying to reinforce the city, then turns toward Vicksburg, defeats another army, and pens it up for the siege to come. The campaign looks like this:

What’s so strange about this campaign — aside from giving the lie to any notion of Grant as a crude butcher who knew nothing of maneuver — is how little it looks like anything else in the Civil War, which did tend to be a matter of large armies crashing into each other with incredible bravery, but also with massive casualties on both sides, and little in the way of decisive results. Instead, here we get a campaign of rapid marches, defeating an enemy in detail, and achieving an utterly decisive victory at the end; it looks like Bonaparte in Italy, 1796, not the 1863 universe of battle.

I don’t quite understand how it happened, but it changed everything.

The last post of the day was “More Science Fiction for Economists (Seriously Time Wasting):”

Noah Smith has a list; all good stuff, although not all to my taste. (I just can’t read Cory Doctorow, and don’t know why). Definitely definitely The Dispossessed, which never seems to lose its relevance.

As I see some commenters have already pointed out, the list really must include Asimov’s Foundation Trilogy; ideally the new folio edition, for which guess who wrote the introduction.

I absolutely second (and third, and fourth) Charlie Stross. But Accelerando, although great, isn’t my top pick. He’s incredibly prolific, with the ability to write in multiple sub-genres, but if economics is what you want, you might want to look at the Merchant Princes novels, which are arguably parallel-universe fantasies that are also essays in development economics. (New edition of the MP novels coming out, with some plot snafus fixed). If you want sheer giddy fun, try the Laundry novels, Lovecraft-meets-hackers-meets-pop-references, with tips of the hat to everything from James Bond to Modesty Blaise.

Neal Stephenson: Actually, The Diamond Age is closest to being an econonovel. And I just loved Anathem.

And any Iain Banks Culture novel; Use of Weapons was my gateway, but Consider Phlebas, or actually any of them, will do. Banks is terminally ill, so his work should be especially treasured now.

Ken MacLeod: The Restoration Game is my favorite, but again there are many fine reads.

Read everything I’ve just mentioned, and you will wasted a large piece of your life. Hey, economists like to suppress their competition too!

I’m eternally grateful to Prof. Krugman for introducing me to the works of Charles Stross.  You’ve GOTTA read the Laundry novels — they’re huge fun.  And now he’s given me another list of things I haven’t read yet, so I’m looking forward to wasting spending some time with good books.

Krugman’s blog, 5/10/13

There were four posts yesterday.  The first was “Land of the Rising Sums:”

The good news for Abenomics keeps rolling in; of course, it’s not over until the sumo wrestler sings, but there has clearly been a major change in Japanese psychology and expectations, which is what it’s all about.

Why does this seem to be working as well as it is? Long ago I argued that to gain traction in a liquidity trap, the central bank needed to credibly promise to be irresponsible — that is, convince investors that it would not rein in monetary expansion once the economy was at full employment and inflation was starting to rise. And this is a hard thing to do; no matter what central bankers may say, history shows that they often revert to type at the first opportunity. The examples of successful changes in expectations tend to involve drastic regime changes, like FDR taking us off the gold standard.

And this is where the tsunami-China moral equivalent of space aliens theory comes in: arguably, the shocks of the past two years have changed Japanese perceptions of what must be done enough to make irresponsibility — or, actually, a serious, sustained commitment to higher inflation — credible, at long last.

Meanwhile, Martin Feldstein is demanding an end to the Fed’s efforts to do the same thing, inducing much ire from David Glasner, who accuses Feldstein of failing to grasp the point that it is all about changing inflation expectations. But it’s actually much worse than Glasner says. Here’s Feldstein:

Mr. Bernanke has emphasized that the use of unconventional monetary policy requires a cost-benefit analysis that compares the gains that quantitative easing can achieve with the risks of asset-price bubbles, future inflation, and the other potential effects of a rapidly growing Fed balance sheet.

So, we must stop QE because it might lead to higher inflation — when expectations of (somewhat) higher inflation are precisely the main point of unconventional monetary policy. You might even say that if QE fails, it will because people like Feldstein are doing their best to block the main channel through which it might work.

By the way, Glasner references an earlier Feldstein piece I missed, which is extraordinary in its own way. Feldstein concedes that the problem is inadequate demand, and talks about what we can do:

What is required is action by the president and Congress: to help homeowners with negative equity and businesses that cannot get credit, to remove the threat of higher tax rates, and reduce the out-year fiscal deficits.

OK, I’m for debt relief. But faced with inadequate demand, our only options are to “remove the threat of higher tax rates” and “reduce out-year fiscal deficits” — both of which are basically ways to summon the confidence fairy. Why not, you know, actually have the government spend more now — or, failing that, cut the current taxes of people likely to spend the money? Everything I can see about Feldstein’s economic framework points to fiscal stimulus as the obvious answer; his refusal to consider that possibility has to be entirely, and unforgivably, political.

The second post of the day was “All About the ECB:”

Joe Weisenthal has a good post going after Roger Altman’s assertion that European austerity was necessary to satisfy the markets. As Paul De Grauwe has been arguing for a while, what has been needed all along to calm the markets isn’t austerity — which doesn’t seem to help at all — but a liquidity backstop from the ECB, which works wonders.

Just to enlarge on Joe’s chart, I have one showing both Italy (his case) and Spain. Different countries, different politics, and some difference in spreads — but the turning points come at exactly the same points, and correspond to changes in ECB policy:

Next up was “Same As They Ever Were:”

Wheee! The Heritage Foundation is engaged in frantic damage control; not only did its big anti-immigration-reform report turn out to be a steaming heap of, um, bad research, but one of the co-authors turns out to have a serious white supremacist background.

It would be a terrible thing to happen to a serious think tank. But Heritage isn’t a serious think tank, which means that all of this is just a bit of overdue poetic justice.

Remember, Heritage came up with the ludicrous claim that the Ryan plan would cut unemployment to 2.8 percent, then tried to scrub the result from its records. It produced ludicrous “studies” purporting to show that small farmers and businessmen were victims of the estate tax. And there are many, many more examples.

The truth is that Heritage has never been in the business of doing economic analysis; it’s just a propaganda agency posing as a think tank. And this time it finally caught up with them.

It’s schadenfreudelicious.  The final post of the day was “Friday Night Music: Sarah Jarosz, Tell Me True:”

Sarah Jarosz – “Tell Me True.”

I was looking for a live version with the full trio, and here it is. They’re performing in New York in a couple of weeks.

Advance notice: I’m taking some personal time. Probably some blogging this weekend, but three columns off, and probably little if any blogging after the weekend.