Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 12/20/14

December 21, 2014

There were two posts yesterday.  The first was “The Oz Effect:”

So more than half of the health advice Dr. Oz gives is either baseless — there’s no evidence for his claims — or wrong — there is evidence, and it contradicts what he says. Julia Belluz tells us not to be surprised:

He is, after all, in the business of entertainment.

But the thing is, there are a lot of Ozzes out there, including in areas you might not consider the entertainment business.

Recently some conference planners tried to recruit me for an event in which I would be presenting the alternative view to the main experts — Arthur Laffer and Stephen Moore. This would be the Art Laffer who among other things warned about soaring inflation and interest rates thanks to the rapid growth in the monetary base (ask the Swiss), and the Stephen Moore who was caught using fake numbers to promote state-level tax cuts.

Obviously these “experts” appeal to the political prejudices of a business audience, but taking their advice would have cost you a lot of money. So why isn’t their popularity dented by the repeated pratfalls? Are they, also, in the entertainment business?

To some extent, the answer is yes. Simon Wren-Lewis had an interesting piece on why the financial sector buys into really bad macroeconomics; he suggested that financial firms aren’t really interested in anything but very short-term forecasting, and that

economists working for financial institutions spend rather more time talking to their institution’s clients than to market traders. They earn their money by telling stories that interest and impress their clients. To do that it helps if they have the same worldview as their clients.

Thinking about Dr. Oz also, I’d suggest, helps explain a related puzzle: even if you grant that the right wants alleged experts who toe the ideological line, why can’t it get guys who are at least competent? Why do they recruit and continue to employ people who can’t do basic job calculations, or read their own tables and notice that they’re making ridiculous unemployment projections, and so on?

My answer has been that anyone competent enough to avoid these mistakes would also be unreliable — he or she might at some point actually take a stand on principle, or at least balk at completely abandoning professional ethics. And I still think that’s part of the story.

But I now also suspect that the personality traits you need to be an effective entertainer on inherently not-so-much-fun subjects like health or monetary policy are inherently at odds with the traits you need to be even halfway competent. If Dr. Oz were the kind of guy who pores over medical evidence to be sure he knows what he’s talking about, he probably couldn’t project the persona that wins him such a large audience. Similarly, a hired-gun economist who actually knows how to download charts from FRED probably wouldn’t have the kind of blithe certainty in right-wing dogma his employers want.

So how do those of us who aren’t so glib respond? With ridicule, obviously. It’s not cruelty; it’s strategy.

Yesterday’s second post was “More Macro Modeling Meta:”

Simon Wren-Lewis, not surprisingly, gets my motivation in writing down an intertemporal-maximization model of the liquidity trap right; although originally, back in 1998, I wasn’t arguing with the market monetarists — I was arguing to some extent with old-fashioned monetarists, and to a larger extent with myself, trying to figure out how to think about this thing.

And I think there’s a larger, vaguer point about how to do economics here.

Where I came in was with the question — for Japan in the 90s, for most of the advanced world now — of whether the central bank can boost the economy simply by “printing money” when short-term interest rates are near zero. IS-LM analysis says no; but there were and still are many economists insisting that this conclusion can’t be right, that basic monetary economics says that increasing the money supply always raises prices in the long run and output in the short run if prices are sticky. And IS-LM is, after all, an ad hoc model that isn’t careful about budget constraints or expectations, so surely the notion of a liquidity trap would go away if you did it right.

I actually believed this myself. But unlike most of the people who say things like this, I actually set out to “do it right”– that is, write down an explicit model, as simple as possible, that didn’t fudge the budget constraints or the role of expectations. And what it told me was that the claim that monetary expansion always “works” is wrong.

The force of this conclusion does not depend on the little model being realistic — after all, the claim was that doing it right would show that the liquidity trap was a myth, so if even a simple, unrealistic model said otherwise, that was enough to prove the claim wrong.

Now, you might argue for the effectiveness of monetary policy at the zero lower bound by appealing to some kind of friction — imperfect capital markets, bounded rationality, something. OK, go ahead and explain to me how that works. The point, however, is that most ZLB denial does not, in fact, rest on a sophisticated argument about frictions; it relies, again, on the assertion that we “know” that money has to be effective, that this is a fundamental proposition. And this turns out to be false, just like the proposition that with rational expectations fiscal stimulus must always crowd out private spending.

Alternatively, you could argue that experience shows that monetary expansion is effective even at the zero lower bound. Again, however, ZLB denial does not rest on empirical evidence; it’s supposed to rest on fundamental economics that turns out not to be fundamental at all. And the empirical evidence actually goes the other way. Even in 1998 I could appeal to lessons from the 1930s; today we have lots more evidence, and it all looks like this:

So if you are convinced that monetary expansion must work, please tell me why. Don’t push words around; as I said, you’re probably engaged in deceptive word games, even if that’s not your intention. Give me a careful analysis of what people are doing, and how the frictions, whatever they are, cause the basic result of monetary impotence to go away.

Now, about the broader and vaguer implications: I don’t think of this story as a demonstration that a New Keynesian approach is superior to IS-LM. After all, what it ended up doing was confirming that IS-LM got it right. And look, people don’t actually engage in the kind of optimization NK models assume. Much of the time — and I know Simon and I aren’t in full agreement here — I think ad hoc, IS-LMish models are better for a first cut: they’re easier to work with, and I see no compelling evidence that fancier intertemporal approaches provide a better picture of reality.

Still, when I am making a policy argument using IS-LM, especially if it’s at odds with conventional policy wisdom, I like to cross-check it against an NK approach, to see if I can get a similar result. It’s just a way of kicking the tires, of increasing the odds that I’m really talking sense. And I also want to cross-check all the theoretical arguments, Hicksian or New Keynesian, against whatever evidence I can scare up.

All of this is a lot more work than, say, intoning solemnly about the dangers of a debased currency, or even than pointing to nominal GDP and asserting that the Fed could have achieved a different result if only it wanted to. But as Keynes said, economics is a difficult and technical subject, though no one will believe it.

Krugman’s blog, 12/19/14

December 20, 2014

There were four posts yesterday.  The first was “Secret Cabals of the Elite:”

It’s easy to mock conspiracy theorists who imagine that everything important in the world is determined by secret cabals — the Trilateral Commission, alumni of Skull and Bones, whatever (which is not to discount the influence of old-boy networks). Even non-crazy people, however, tend to imagine that people whose names they recognize form much more of a cohesive social group than they really do. I can’t vouch for what happens at Bohemian Grove or suchlike, but if your notion is that I routinely hang out with media figures, let alone influential politicians or celebrities — well, no.

But last night was the final Colbert Show — and for a couple of hours, the fantasy of everyone you’ve heard of in one room came true. Kareem Abdul Jabbar, Mandy Patinkin, Gloria Steinem, Patrick Stewart, Henry Kissinger, General Odierno, Neil deGrasse Tyson, and Big Bird, all in one place.

I gawked, and then I walked home, picking up a few things I needed at a Duane Reade along the way.

Yesterday’s second post was “Switzerland and the Inflation Hawks:”

I tend to go on a lot about the persistence of inflation paranoia, but it is an amazing thing. A lot of people have been predicting soaring inflation since 2009 if not earlier, and have refused to change their views even though actual events have been nothing like what they predicted — and almost exactly what liquidity-trap theorists predicted, in advance.

There are, however, different levels of denial here. The inflation truthers insist that the government is hiding the real numbers; they’re basically nut cases, with nothing going for them except immense wealth and power. But even among normally sensible conservative economists there has been a remarkable determination to see the non-inflationary story as somehow the result of very special circumstances. For example, Martin Feldstein and others have claimed that it’s all about the 0.25 percent, that’s right, 0.25 percent interest rate the Fed has been paying on excess reserves. Without that, they say, quantitative easing would indeed have produced the big inflation they keep predicting.

So, can we talk about Switzerland?

Switzerland has never paid interest on reserves — and lately it has taken to doing the opposite, charging banks 0.25 percent for the privilege of parking their money at the central bank. So has the Swiss National Bank’s huge increase in the monetary base, which dwarfs what the Fed has done, produced inflation?

Well, look at the included chart. Monetary base up by a factor of eight. Money supply up by much less, because banks didn’t lend the funds out. And consumer prices flat, indeed flirting with deflation.

This is all exactly what a basic liquidity trap model — the one I laid out in 1998 — predicted. So the inflationistas are finally going to concede their mistake, right?

Hey, who said economists lack a sense of humor?

The third post yesterday was “The Simple Analytics of Monetary Impotence (Wonkish):”

I’ve been having a back-and-forth over monetary policy at the zero lower bound, some of it in public and some in private correspondence, which is basically a continuation of a conversation that reaches back many years. And it occurred to me that even many of the economists I’m talking to don’t know about an analytical approach that, it seems to me, lets you cut through most of the confusion here. It’s the basis of my old 1998 model, but I don’t think people are reading that piece even when I direct them to it. So let me lay out the core insight that changed my own mind about monetary policy in a liquidity trap (and is useful for fiscal policy too.)

What I did in my old analysis was to radically simplify the dynamics by imagining an infinite-horizon model in which all the action takes place in period one. That is, there may be shocks to consumer preferences, or fiscal policy, or monetary policy, but they all take place “now”; after period 2 everything stays the same. What this in turn means is that we can take the period 2 price level and level of consumption as given. In what follows I’ll use an asterisk to refer to period 2 and subsequent values — P* is the period 2 price level, C* the period 2 consumption level — and let un-asterisked symbols refer to period 1.

I also, as a first pass, assume that there is no investment, just consumption.

Now ask the question: what determines period 1 consumption?

Well, if we have rational expectations and frictionless capital markets — which we don’t, but let’s see what would happen if we did — the answer is that the ratio of marginal utility in period 1 to marginal utility in period 2 must equal the relative price of consumption in the two periods, where the relative price is the real discount rate, the rate at which one unit of consumption now can be converted into units of consumption in the future. If r is the nominal one-period interest rate, this says that

MU/MU* = (P/P*)(1+r)

To make things even simpler, assume logarithmic utility, so that marginal utility is 1/C. Then this becomes

C*/C = (P/P*)(1+r)


C = C*(P*/P)/(1+r)

So we have an Euler equation that lets us read off current consumption from future consumption, current and future price levels, and the interest rate. And we can take future consumption as given.

Now suppose that we’re in a New Keynesian world in which prices are temporarily sticky; so P is given. And suppose we’re at the zero lower bound, so r=0. Then there’s only one moving part here: the expected future price level. Anything you do — monetary or fiscal — affects current consumption to the extent, and only to the extent, that it moves the expected future price level. Full stop, end of story.

An immediate implication is that the current money supply doesn’t matter. The future money supply matters, because it can affect the future price level, so a permanent increase in M can affect the economy — but that effect works entirely through expectations. What you do now matters only to the extent that people take it as an indication of what you will do in the future. Don’t talk to me about monetary neutrality, or how it stands to reason that money must matter, or helicopter money, or even money-financed deficits; we’ve taken all of that into account en passant with the Euler equation.

Now, if we let households be liquidity-constrained, giving them transfer payments can affect current spending; but that’s a fiscal point, not really about money.

Another perhaps less immediate implication is that there is no crowding out from temporary fiscal expansion. Suppose the government goes out and buys a bunch of stuff while we’re at the zero lower bound. This doesn’t affect future consumption, and therefore doesn’t affect current consumption either. Notice that this is in an approach with full Ricardian equivalence; so every economist who claimed that Ricardian equivalence makes fiscal expansion ineffective has actually shown that he doesn’t understand the concept.

Again, I’m not claiming that this Euler equation is The Truth. If you want to make arguments about policy that rely on some failure of the assumptions, especially imperfect capital markets, fine. But that’s not what I hear in most of this discussion; what I hear instead are attempts to talk things through that end up being, unintentionally, word games. Instead of telling a specific story about what people are supposed to be doing and why, economists try to reason in terms of concepts like monetary neutrality that aren’t as well-defined as they think, and end up fooling themselves into believing that they’ve demonstrated things they haven’t.

Now, one good exception is Brad DeLong’s argument that money does too work in a liquidity trap because such traps are always the result of disrupted financial markets. What I’d say is that they are *sometimes* caused by financial disruption. But is this one of those times? As the chart shows, we had a lot of disruption in 2008-9. Is that still a major factor in our economic weakness? Do we think that Japan’s problems have been rooted in the banking system all these years?

Anyway, that’s how I see it. If you disagree, please try to put your argument in terms of what the people in your model are doing — not

Apparently part of the last paragraph (I assume it was to be the last) was cut off since that’s how it ends…  He ended the week with music, as usual.  Here’s “Friday Night Music: The Roches, Winter Wonderland:”

After all this time, NYC in the holiday season still has magic. So here, reposted, is a celebration in the native argot:


Krugman’s blog, 12/18/14

December 19, 2014

There was one post yesterday, “Notes on Russian Debt:”

I have to admit that the Russian crisis has me feeling young again — it’s back to all the old issues from the Asian debt crisis of 1997-1998, when bad things mainly happened to other countries and the discussion here was relatively technocratic; also, I was a lot younger (did I mention that?). And although it’s very serious stuff — I keep pulling myself up short when I want to use standard metaphors like an economic meltdown, because I suddenly remember that Putin has nukes — I am getting some satisfaction in trying to puzzle out the underlying issues.

Which brings me to the interesting question of Russian debt.

Obviously plunging oil prices are bad for petroeconomies. But what is making the Russian experience so dire is the linkage oil->ruble->balance sheets, because of all the dollar- and euro-denominated debt. This, however, raises several questions.

First, how did they get that debt? Here’s the Russian current account balance over the past couple of decades:

It has been in consistent large surplus, with a cumulative surplus of more than $900 billion. Russia should not be a debtor country. It has managed this nonetheless, presumably because corporations and banks have borrowed abroad, and somehow that money has ended up invested in luxury London real estate and other things. It would be nice to have a good picture of how the flow of funds worked.

That said, at first glance the debt level doesn’t look too high. Here’s the ratio to GDP:

The central bank helpfully points out that this is in a range the IMF considers low-risk, and there wasn’t any visible upward trend.

But watch out for that denominator. Debt to GDP was stable, but GDP was rising fast in dollar terms, not because of real growth, but because of real appreciation. Compare the actual rise in the ruble price of a dollar, which was modest until the past few weeks, with the rise that would have compensated for relative Russian inflation:

So I would argue that Russia was in fact going rapidly deeper into debt, but that this was masked by the growing overvaluation of the ruble thanks to high oil prices. Now comes the fall, and suddenly debt looks like a much bigger issue.

And of course the ratio of debt to exports has also shot up.

I’d add a further suspicion: that the reliance on oil exports worsens the problem because ruble depreciation can’t bring about a big export response, at least in the short to medium run — not enough of a non oil base, so even a large percentage increase doesn’t do very much.

Anyway, interesting stuff. At this point the approved move is either (a) go to the IMF or (b) invade the Malvinas. Somehow, (a) doesn’t seem likely — and Putin did (b) in advance.

Krugman’s blog, 12/17/14

December 18, 2014

There were two posts yesterday.  The first was “Lowflation and the Fed:”

At the aforementioned economics dinner, we went around the table to ask who believed the Fed would actually raise rates in 2015. Officials at the Fed have been signaling that they will; but most of the people around the table didn’t believe them. This morning’s consumer price report explains why.

Basically, while growth and job creation have finally been pretty good lately, there is so far no sign whatever that the economy is overheating. Core inflation remains below the Fed’s target (the Fed focuses on a different measure that usually runs lower than the CPI, so this report is actually fairly far below target.)

Add to this troubles abroad — the direct spillover from Russia or even Europe is fairly small, but the rising dollar means that good news on manufacturing may not last — and there is a real risk that any rate hike will turn out to have been a mistake. And it’s a mistake that would be very costly, because it could all too easily set the stage for a Japan/Europe style long-term low-inflation trap (yes, at this point I think we can put the euro area in the same category).

Of course, this is all about what the Fed should do, not what it will. But I guess I believe that top officials at the Fed have a view of the world not too different from mine, and will come around to the same conclusions.

The second post yesterday was “Jeb’s Bubble:”

So not-George Bush is running. Why, exactly?

I’m not talking about his motivations; I’m asking why, exactly, he is considered presidential material.

Back in the day, there was an answer; glowing profiles like this one declared that he had been a fabulous governor, as demonstrated by his economic success:

In a state with a surging population, Bush has presided over a booming economy with the highest rate of job creation in the country and an unemployment rate of 3.0 percent (the national average is 4.6 percent).

Actually, this would have been silly even if Florida had a well-founded boom — governors don’t matter that much. But in any case, we now know something about the other “Bush boom” — as you can see from the attached chart, it was all about a monstrous housing bubble. Bush the other didn’t cause that bubble — but all his alleged success involved taking a ride on it.

So he wasn’t an exceptional governor, or actually an exceptional anything — except maybe exceptionally good at cashing in after leaving office. Why, exactly, is he running?

Because thus far he seems the (possibly) least insane among the riders in the 2016 Clown Car…

Krugman’s blog, 12/16/14

December 17, 2014

There were two posts yesterday.  The first was “The Ruble and the Textbooks:”

OK, this is a bit funny: This morning Tim Duy addresses the woes of the ruble, which is in free fall despite a big rate hike, and declares that it “appears really quite textbook”. Meanwhile Matthew Yglesias says that what Russia is doing is “the textbook approach to handling a currency crisis”, and speculates about why it isn’t working.

I’m with Duy here; not sure if it’s actually in any textbook, but as I explained yesterday, for aficionados of emerging-market currency crises this is all quite familiar. (Side note: I invented currency crises — not the thing itself, obviously, but the modern literature — in 1979. Really. And business has been good ever since.) When you have big balance-sheet problems involving foreign-currency debt, an interest-rate hike that tries to discourage capital flight damages the economy, and hence those same balance sheets, from another direction, and it’s common, even standard, for the effort to fail. Most notably, tight-money policies were really really unsuccessful during the Asian financial crisis of 1997-8, on which you can read my take here.

Consider the chart, which shows the policy interest rate in Indonesia: during the 1998 crisis this rate was hiked to 70 percent, yet this wasn’t sufficient to stop a plunge in the rupiah to a fifth of its former value. And Indonesia wasn’t invading any of its neighbors, although it did have a failing authoritarian regime.

So Russia isn’t that unusual a story, except for the nukes.

Yesterday’s second post was “The Limits of Purely Monetary Policies:”

Last night I had an austere repast — OK, steak and a lot of red wine — with some civilized financial-industry economists (they do exist), and heard what is apparently the joke du jour: “Money isn’t everything — good health is 2 percent.”

Well, the money supply isn’t everything, either.

Ambrose Evans-Pritchard pushes back against my in-passing criticism of a column I mainly agree with, in which I argued that it’s hard to see why anyone believes that money supply increases will do the trick after the past six years. I understand where Evans-Pritchard is coming from, because I’ve been there. Indeed, it’s where I started. But I had my road-to-Damascus moment — or more accurately road-to-Tokyo moment — back in 1998. And maybe describing my own conversion to monetary pessimism may help clarify what’s happening now.

So, back in 1998 I was looking at Japan’s troubles, and — like Evans-Pritchard and many others now — believed that the Bank of Japan could surely end deflation if it really tried. IS-LM said not, but I was sure that if you really worked it through carefully you could show that, say, doubling the monetary base will always raise prices, even if you’re at the zero lower bound. So I set out to show the point with a minimalist New Keynesian model; link to the little paper I wrote here. (By the way, I screwed up the aside on fiscal policy. In that model, the multiplier is one.)

To my own surprise, what the model actually said was that when you’re at the zero lower bound, the size of the current money supply does not matter at all. You might think that it’s a fundamental insight that doubling the money supply will eventually double the price level, but what the models actually say is that doubling the current money supply and all future money supplies will double prices. If the short-term interest rate is currently zero, changing the current money supply without changing future supplies — and hence raising expected inflation — matters not at all.

And as a result, monetary traction is far from obvious. Central banks can change the monetary base now, but can they commit not to undo the expansion in the future, when inflation rises? Not obviously — and certainly “credibly promising to be irresponsible”, to not undo expansion in the face of future inflation, is a much harder thing to achieve than simply acting when the economy is depressed.

But, asks Evans-Pritchard, what if the central bank simply gives households money? Well, that is, as he notes, really fiscal policy — it’s a massive transfer program rather than a conventional monetary operation. (And Ricardian equivalence, for what it’s worth, says that it would have no effect even if you could do it — households would know that future taxes will have to rise to pay for today’s gift, and save all of it.) You may say that you don’t care what it’s called. But the distinction isn’t just one of academic classification: Central banks aren’t in the business of just giving money away; what they do is always some kind of asset swap, in which they buy assets or make loans which then become assets. I’m pretty sure that neither the Fed nor the Bank of England has the legal right to just give money away as opposed to lending it out; if I’m wrong about this, put me down for $10 million, OK?

Still, isn’t this just theory? Well, no. Huge increases in the monetary base in previous liquidity trap episodes had no visible effect. And now we have the post-2008 experience, and it’s certainly not an example of central banks easily dealing with economic downdrafts.

Just to be clear, I have supported QE in both Britain and the US, on the grounds that (a) central bank purchases of longer-term and riskier assets may help and can’t hurt, and (b) given political paralysis in the US and the dominance of bad macroeconomic thinking in the UK, it’s all we’ve got. But the view I used to hold before 1998 — that central banks can always cause inflation if they really want to — just doesn’t hold up, theoretically or empirically.

Krugman’s blog, 12/15/14

December 16, 2014

There was one post yesterday, “Putin on the Fritz:”

It’s impressive just how quickly and convincingly the wheels have been coming off the Russian economy. Obviously the plunge in oil prices is the big driver, but the ruble has actually fallen more than Brent — oil is down 40 percent since the start of the year, but the ruble is down by half.

What’s going on? Well, it turns out that Putin managed to get himself into a confrontation with the West over Ukraine just as the bottom dropped out of his country’s main export, so that a financing shock was added to the terms of trade shock. But it’s also true that drastic effects of terms of trade shocks are a fairly common phenomenon in developing countries where the private sector has substantial foreign-currency debt: the initial effect of a drop in export prices is a fall in the currency, this creates balance sheet problems for private debtors whose debts suddenly grow in domestic value, this further weakens the economy and undermines confidence, and so on.

The central bank may (or may not, as seems to be true in Russia right now) be able to limit the currency plunge by raising interest rates (now above 13 percent on Russian 10-years), but only at the cost of deepening the recession. Eichengreen et al (pdf), in a good discussion of all this in the Latin American context, give the example of Chile, which was hit very hard by falling copper prices at the end of the 1990s despite a much more favorable institutional setup than Russia right now — and, of course, without having de facto invaded a neighboring country.

I have no idea what this implies for either Russian politics or geopolitics. But talk of a new cold war, comparisons between Putin’s Russia and the USSR, look a bit silly now, don’t they?

Krugman’s blog, 12/13/14

December 14, 2014

There were two posts yesterday.  The first was “Is Our Economic Commentators Learning?”:

We are now in our seventh year at the zero lower bound. Over that period we’ve seen massive deficits rise and fall, aggressive monetary expansion and ill-advised monetary tightening, extreme fiscal austerity, and more. At this point we should therefore have a pretty good idea of how things work in this environment. And as I’ve often pointed out, everything has been more or less exactly what you would have expected from IS-LM (with the central bank controlling the monetary base, but not the endogenous money supply).

It’s remarkable, then, how much commentary in the media involves assertions that are completely at odds with everything we’ve seen since the financial crisis. I made fun of belief in invisible bond vigilantes and the confidence fairy in mid-2010, and sure enough, there have been no sightings of either in all the years since. Yet you’d never know that from the media commentary.

Simon Wren-Lewis offers a depressing example: he finds Robert Peston of the BBC continuing to talk about interest rates by invoking the invisible bond vigilantes – when as Wren-Lewis notes, France now pays much lower interest rates on its debt than the UK, and as he doesn’t note, so does Japan, with its very large debt and aging population. Worse still, however, Peston describes his fantasies – OK, I guess you could call them “speculations”, but anyway there is no evidence that they are driven by anything outside his own imagination – as the message being conveyed by “Mr. Market.” Through telepathy?

But belief in the invisible bond vigilantes and the confidence fairy isn’t the only faith that seems oddly impervious to evidence. Ambrose Evans-Pritchard, in an otherwise coherent description of Europe’s deflation risk, approvingly quotes Tim Congdon blithely declaring that monetary reflation in a liquidity trap is no problem:

The interest rate is totally irrelevant. What matters is the quantity of money. Large scale money creation is a very powerful weapon and can always create inflation.

Sure. Just look, in the accompanying chart, at the rate of M1 growth in the US versus the Fed’s preferred measure of inflation. Feel the power! Seriously, how can an alleged expert be talking straight monetarism at this point in history?

You have to wonder, where does conventional wisdom about how the economy works come from? Not from economic models, which actually don’t lead to the popular stories about bond vigilantes and confidence fairies, or say that the money supply is decisive when you’re at the zero lower bound. Not from experience, which has been utterly at odds with “mediamacro” for years. Apparently it comes from the gut – or maybe from some other anatomical feature in the same general vicinity. And then these gut feelings are reported as facts.

Yesterday’s second post was “Petrothoughts:”

Just leaving a conference in Dubai, and thinking about oil prices. (A lot of the conference was actually about geopolitics, and I don’t want to think about the quite grim stuff from that end.) So, some not especially organized notes.

One involves the failure of OPEC to restrict production to support prices. I guess I wonder why anyone thought that was likely. My understanding has always been that when people say OPEC, the subtitle reads “Saudi Arabia”, which is the only player that has ever done much to restrict output to sustain prices. And Saudi Arabia only accounts for about 13 percent of world production, which gives it limited power even given inelastic demand (especially because unconventional oil supply is probably quite price-elastic, further reducing Saudi market power.)

Also, consider the precedents: the last time there was anything like the recent oil glut, namely back in the 1980s, even drastic cuts in Saudi production, shown in the accompanying figure, weren’t enough; eventually the Saudis gave up, and prices crashed, so why should they go through that again?

My other thought is that Venezuela-with-nukes (Russia) keeps looking more vulnerable to crisis. Long-term interest rates at almost 13 percent, a plunging currency, and a lot of private-sector institutions with large foreign-currency debts. You might imagine that large foreign exchange reserves would allow the government to bail out those in trouble, but the markets evidently don’t think so. This is starting to look very serious.

And now the joy of trying to sleep on a very long flight.

Krugman’s blog, 12/12/14

December 13, 2014

There was one post yesterday, “Friday Night Music: Peter Gabriel, 1993:”

Yes, it’s morning, but I’m traveling all day. I’ve been listening to Secret World lately, so here’s a performance from 20 years ago:


Krugman’s blog, 12/10/14

December 11, 2014

There were two posts yesterday.  The first was “American Evil:”

As the Bush administration fades away in the rearview mirror, my sense is that many people — even liberals — are forgetting what it was really like. It becomes, in memory, just another administration whose policies you disapprove of, like the reign of Bush the elder.

But it wasn’t. It was an administration that deliberately misled us into war, exploiting an atrocity to pursue an agenda that had nothing to do with that atrocity — and causing vast amounts of death and destruction in the process, not to mention undermining American strength.

And it was an administration under which America became a torturer, with the enthusiastic approval of top officials.

This wasn’t normal. And if it’s going be normal from now on, all the more reason to remember the Bush years with horror.

Amen.  Yesterday’s second post was “Jean-Claude Yellen:”

The Fed definitely seems to be gearing up for monetary tightening, even though inflation remains below target. And I’m with Ryan Avent: this will, if it happens, be a big mistake — just as Jean-Claude Trichet’s decision to raise rates in Europe in 2011 was a big mistake, just as the Swedish Riksbank’s early rate hike was a mistake, just as Japan’s rate hike in 2000 was a mistake.

And you would think that the Fed would understand that. In fact, I suspect it does, and is somehow letting itself be bullied into doing the wrong thing anyway. More on that in a minute.

First, on the policy substance: The point is not that we know that we’re still far from full employment. I think we are, but the truth is that I don’t know, you don’t know, and Stan Fischer doesn’t know. So the question is one of weighing the risks. And the fact is that the damage the Fed would do if it hikes rates too soon vastly outweighs the damage it would do if it waits too long.

Suppose the Fed waits too long. Well, inflation ticks up — probably not much, since the short-run Phillips curve looks very flat. And the Fed has the tools to rein the economy in. It would be annoying, unpleasant, and no doubt there would be Congressional hearings berating the Fed for debasing the dollar etc.. But not a really big problem.

Suppose, on the other hand, that the Fed raises rates, and it turns out that it should have waited. This could all too easily prove disastrous. The economy could slide into a low-inflation trap in which zero interest rates aren’t low enough to achieve escape — which has happened in Japan and is pretty clearly happening in the euro area. Also, there is now very strong reason to suspect that a protracted slump will inflict large losses on the economy’s future productive capacity.

And if someone tells you that these risks aren’t that big, consider this: we used to be told that 2 percent inflation was enough to make the risks of hitting the zero lower bound minimal — less than 5 percent in any given year. In fact, however, of the roughly 20 years since inflation dropped to circa 2 percent, 6 years — 30 percent! — have been spent in a liquidity trap. This says that we should be very afraid of missing our chance to escape from the trap out of an urge to normalize monetary policy too soon.

The thing is, I know that Janet Yellen, Stan Fischer, and the Fed staff know this — they’re very familiar with recent history and all the relevant economic analysis. So why do they seem to be rhetorically preparing the ground for early rate hikes?

My guess — and it’s only that — is that they have, maybe without knowing it, been bludgeoned into submission by the constant attacks on easy money. Every day the financial press, many of the blogs, cable financial news, etc, are full of people warning that the Fed’s low-rate policy is distorting markets, building up inflationary pressure, endangering financials stability. Hard-money arguments, no matter how ludicrous, get respectful attention; condemnations of the Fed are constant. If I were a Fed official, I suspect that I would often find myself wishing that the bludgeoning would just stop, at least for a while — and perhaps begin looking for an opportunity to prove that I’m not an inflationary money-printer, that I can take away punchbowls too.

So my guess is that the Fed, given an improving US job market, is strongly tempted to buy some peace by hiking rates a little, just to quiet the critics for a few months.

But the objective case for a rate hike just isn’t there. The risks of premature tightening are huge, and should not be taken until we have a truly solid recovery that includes strong wage gains and inflation clearly on track to rise above target. We don’t have any of that, and if the Fed acts nonetheless, it has the makings of tragedy.

Krugman’s blog, 12/9/14

December 10, 2014

There were two posts yesterday.  The first was “Profiles in Coreage:”

Tim Duy, in the course of a discussion of the outlook for Fed policy, reminds us of the spring of 2011, when headline inflation had risen a lot mainly due to oil prices. He portrays Ben Bernanke as being all alone in insisting that the inflation bump was a blip, and would soon fade away. Actually, that’s not quite right; as far as I recall, most saltwater economists agreed. I was writing about it often. And the Fed, after all, routinely focuses on core inflation rather than headline numbers. Still, Bernanke was definitely under pressure.

What Duy doesn’t say is that the inflation fight of 2011 was about more than inflation; it was another aspect of the fight over how the economy works – and another big victory for the Keynesian view. The concept of core inflation arises out of the notion that most prices are “sticky”, revised only on occasion, and that when they are revised they are set taking into account expected inflation over some length of time looking forward.

As I tried to explain early on, this means that we need to distinguish between an underlying, sluggish inflation rate that is hard either to increase or reduce, and fluctuations around that rate reflecting more volatile prices. Standard measures of core inflation are imperfect ways of getting at this distinction, but they are vastly better than the headline numbers – and have been hugely vindicated by the experience of recent years. So I’m glad to see all the people who issued dire warnings about inflation in 2011 acknowledging that they had the wrong model. Hahahahaha.

And yes, this means that you should discount the effects of falling oil prices in the same way you discount the effects of rising oil prices. I would nonetheless urge the Fed to hold off on rate hikes, but for different reasons – the asymmetry in risks between raising rates early and raising them late. And I worry that the Fed may be losing the thread here (hi Stan!). But that’s another topic.

Yesterday’s second post was “On Not Being Stupid:”

John Cochrane has a remarkably reasonable post walking back some of his earlier diatribes, and I was particularly pleased to see him acknowledge that Mike Woodford’s work on monetary policy is first-rate research by a first-rate researcher. May I suggest, then, that he also read Woodford on fiscal policy (pdf)?

Woodford’s paper is from 2010, but the basic framework he uses was familiar to everyone on my side of the debate — me, Christy Romer, Brad DeLong, Alan Blinder — long before; you can see me using essentially the same kind of approach to talk through some stimulus issues here. Some of us like to step back and forth between intertemporal models like Woodford’s and ad hoc models like IS-LM, but we’ve always made the effort to see whether a policy makes sense both ways.

So it came as something of a revelation back in 2009 when Cochrane declared that the case for fiscal policy was a fairy tale nobody believed, Lucas accused Christy Romer of producing a shlock model to justify big government, etc.. It revealed that these people had stopped listening years, indeed decades ago. And it has been remarkable in the years since to see how determined the anti-Keynesians are to keep believing that Keynesians are stupid.

Well, at least Cochrane now concedes that Woodford isn’t stupid. Progress!


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