Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 10/28/14

October 29, 2014

There were two posts yesterday.  The first was “Notes on Japan:”

I’m going to Japan soon, and have been putting some numbers and thoughts together, both about Abenomics and the longer-term lessons from the Japanese experience. Here are some notes on the way.

First, can we stop writing articles wondering whether Europe or the United States might have a Japanese-type lost decade? At this point the question should be whether there is any realistic possibility that we won’t. Both the US and Europe are approaching the 7th anniversary of the start of their respective Great Recessions; the US is far from fully recovered, and Europe not recovered at all. Japan is no longer a cautionary tale; in fact, in terms of human welfare it’s closer to a role model, having avoided much of the suffering the West has imposed on its citizens.

Part of the impression that Japan has been a bigger disaster comes, of course, from Japanese demography: if you look at total GDP, or even GDP per capita, you miss the fact that Japan’s working-age population has been declining since 1997. I’ve tried to update the numbers on real GDP per working-age adult, defined as 15-64; I start in 1993 because of annoying data problems, but it would look similar if I took it back a few more years. Here’s a comparison of the euro area, the US, and Japan:

So even in growth terms Japan doesn’t look much worse than the US at this point, and is actually slightly ahead of the euro area. That doesn’t mean Japan did OK; it just means that we’ve done terribly.

What about Abenomics? The decision to go ahead with the consumption tax increase — which some of us pleaded with them not to do — dealt a serious blow to the plan’s momentum. There has been some recovery in growth:

But losing momentum is a really bad thing here, since the whole point is to break deflationary expectations and get self-sustaining expectations of moderate inflation instead. For what it’s worth, the indicator of expected inflation I suggested, using US TIPS, interest differentials, and reversion to long-run purchasing power parity, is holding up:

But I still worry that Japan may fall into the timidity trap.

The whole business with the consumption tax drives home a point a number of people have made: the conventional view that short-term stimulus must be coupled with action to produce medium-term fiscal stability sounds prudent, but has proved disastrous in practice. In the US context it means that any effort to help the economy now gets tied up in the underlying battle over the future of the welfare state, which means that nothing happens. But even where that isn’t true, talking about fiscal sustainability when deflationary pressure is the clear and present danger distracts policy from immediate needs, and can all too easily lead to counterproductive moves — as just happened in Japan. When I see, say, the IMF inserting into its latest Japan survey (pdf) a section titled “Maintaining focus on fiscal sustainability” my heart sinks (and so, maybe, does Abenomics); it’s hard to argue against sustainability, but under current conditions it means taking your eye off the ball, and Japan really, really can’t afford to do that.

More notes as my cramming for the coming quiz continues.

Yesterday’s second post was “Lars Svensson 1, Sadomonetarists 0:”

Fast FT tells it like it is.

But it does tell you something about the difficulty of making use of good economics and good economists. The Riksbank takes on as deputy governor one of the world’s leading experts on precisely the monetary conditions the world now faces; what’s more, he and those of similar views have seen many of those views — views that many people found implausible — vindicated by events since the financial crisis, in what amounts to a remarkable success for economic analysis. And yet the rest of the Riksbank brushes aside everything he says, going instead for gut feelings and sadomonetarist cliches.

And of course Lars was completely right — but the damage may be irreversible.

Krugman’s blog, 10/27/14

October 28, 2014

There were four posts yesterday.  The first was “What Secular Stagnation Isn’t:”

Et tu, Gavyn? In the course of an interesting piece suggesting that there has been a sustained slowdown in the trend rate of growth, Gavyn Davies declares that

Some version of secular stagnation does seem to be taking hold.

He later acknowledges that there are different meanings assigned to the term; but it’s really important not to feed the confusion. To the extent that secular stagnation is an important and perhaps shocking concept, it really has to be distinguished from the proposition that potential growth is slowing down. What I wrote:

For those new to or confused by the term, secular stagnation is the claim that underlying changes in the economy, such as slowing growth in the working-age population, have made episodes like the past five years in Europe and the US, and the last 20 years in Japan, likely to happen often. That is, we will often find ourselves facing persistent shortfalls of demand, which can’t be overcome even with near-zero interest rates.

Secular stagnation is not the same thing as the argument, associated in particular with Bob Gordon (who’s also in the book), that the growth of economic potential is slowing, although slowing potential might contribute to secular stagnation by reducing investment demand. It’s a demand-side, not a supply-side concept. And it has some seriously unconventional implications for policy.

This is a really important distinction, because secular stagnation and a supply-side growth slowdown have completely different policy implications. In fact, in some ways the morals are almost opposite.

If labor force growth and productivity growth are falling, the indicated response is (a) see if there are ways to increase efficiency and (b) if there aren’t, live within your reduced means. A growth slowdown from the supply side is, roughly speaking, a reason to look favorably on structural reform and austerity.

But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time).

So please, let’s not confuse these issues. This isn’t some academic quibble; we’re trying to understand what ails us, and saying that high blood pressure and low blood pressure are more or less the same thing is not at all helpful.

The second post yesterday was “When Banks Aren’t the Problem:”

OK, an admission: Sometimes it seems to me as if economists and policymakers have spent much of the past six years slowly, stumblingly figuring out stuff they would already have known if they had read my 1998 Brookings Paper (pdf) on Japan’s liquidity trap. For example, there’s been huge confusion about whether Ricardian equivalence makes fiscal policy ineffective, vast amazement that increases in the monetary base haven’t led to big increases in the broader money supply or inflation; yet that was all clear 16 years ago, once you thought hard about the Japanese trap.

And now here we go with another: the role of troubled banks. Europe has done its stress tests, which aren’t too bad; but now we’re getting worried commentary that maybe, just maybe, a clean bill of banking health won’t stop the slide into deflation.

Folks, we’ve been there; in the 90s it was conventional wisdom that Japan’s zombie banks were the problem, and that once they were fixed all would be well. But I took a hard look at the logic and evidence for that proposition (pp. 174-177), and it just didn’t hold up.

I know, I know — blowing my own horn, and all that. But if I am not for myself, who will be for me? And in any case, it has been really frustrating to watch so many people reinvent fallacies that were thoroughly refuted long ago.

Oh, and if people had read my old stuff they might have managed to avoid embarrassing themselves so much in open letters to Bernanke and suchlike.

Yesterday’s third post was “ACA OK:”

The Times has a very nice survey of the results to date of the Affordable Care Act, aka Obamacare, aka death panels and the moral equivalent of slavery.

The verdict: It’s going well. A big expansion in coverage, which is affordable for a large majority; the main exceptions seem to be people who went for the minimum coverage allowed, keeping premiums down but leaving large co-payments. None of the predictions of disaster has come even slightly true.

The last post yesterday was “Open Letters of 1933:”

My friend and old classmate Irwin Collier, of the Free University of Berlin, sends me to an open letter to monetary officials warning of the dangers of printing money and debasing the dollar, claiming that these policies will undermine confidence and threaten to create a renewed financial crisis. But it’s not the famous 2010 letter to Ben Bernanke, whose signatories refuse to admit that they were wrong; it’s a letter sent by Columbia economists in 1933 (pdf):

It’s all there: decrying inflation amid deflation, invocation of “confidence”, a chin-stroking pose of being responsible while urging policies that would perpetuate depression. Those who refuse to learn from the past are condemned to repeat it.

Krugman’s blog, 10/25/14

October 26, 2014

There was one post yesterday, “Notes on Easy Money and Inequality:”

I’ve received some angry mail over this William Cohan piece attacking Janet Yellen for supposedly feeding inequality through quantitative easing; Cohan and my correspondents take this inequality-easy money story as an established fact, and accuse anyone who supports the Fed’s policy while also decrying inequality as a hypocrite if not a lackey of Wall Street.

All this presumes, however, that Cohan knows whereof he speaks. Actually, his biggest complaint about easy money is mostly a red herring, and the overall story about QE and inequality is not at all clear.

Let’s start with the complaint that forms the heart of many attacks on QE: the harm done to people trying to live off the interest income on their savings. There’s no question that such people exist, and that in general low interest rates on deposits hurt people who don’t own other financial assets. But how big a story is it?

Let’s turn to the Survey of Consumer Finances (pdf), which has information on dividend and interest income by wealth class:

 

The bottom three-quarters of the wealth distribution basically has no investment income. The people in the 75-90 range do have some. But even in 2007, when interest rates were relatively high, it was only 1.9 percent of their total income. By 2010, with rates much lower, this was down to 1.6 percent; maybe it fell a bit more after QE, although QE didn’t have much impact on deposit rates. The point, however, is that the overall impact on the income of middle-income Americans was, necessarily, small; you can’t lose a lot of interest income if there wasn’t much to begin with. If you want to point to individual cases, fine — but the claim that the hit to interest was a major factor depressing incomes at the bottom is just false.

There’s a somewhat different issue involving pensions: as the Bank of England pointed out in a study (pdf) that a lot of Fed-haters have cited but fewer, I suspect, have actually read, easy money has offsetting effects on pension funds: it raise the value of their assets, but reduces the rate of return looking forward. These effects should be roughly a wash if a pension scheme is fully funded, but do hurt if it’s currently underfunded, which many are. So the BoE concludes that easy money has somewhat hurt pensions — but also suggests that the effect is modest.

So where does the impression that QE has involved a massive redistribution to the rich come from? A lot of it, I suspect, comes from the fact that equity prices have surged since 2010 while housing has not — and since middle-class families have a lot of their wealth in houses, this seems highly unequalizing.

Here, however, I think it’s useful to go back to first principles for a second. Do we expect easy money to have differential effects on asset prices? Yes, but mainly having to do with longevity. Values of short-term assets like deposits or, for that matter, software that will soon be obsolete don’t vary much with interest rates; values of long-term assets like housing should vary a lot. Equities are claims on the assets of corporations, which include a mix of short-term stuff like software, long-term stuff like structures, and invisible assets like goodwill and market position that may span the whole range of longevity.

The point is that it’s not at all obvious why housing should be left behind in general by easy money. In fact, one of the dirty little secrets of monetary policy is that it normally works through housing, with little direct impact on business investment.

So why was this time different? Surely the answer is that housing had an immense bubble in the mid-2000s, so that it wasn’t going to come roaring back. Meanwhile, stocks took a huge beating in 2008-9, but this was financial disruption and panic, and they would probably have made a strong comeback even without QE.

If we take a longer-term perspective, you can see that the relationship between monetary policy and stocks versus housing varies a lot. The charts show real stock prices (from Robert Shiller) and real housing prices:

Credit Robert Shiller

 

 

The easy-money policies that followed the bursting of the 90s stock bubble produced a surge in housing prices, not so much in stocks — the opposite of recent years. The point is that a lot depends on the history, and the belief that QE systematically favors the kinds of assets the wealthy own is wrong or at least overstated.

Meanwhile, for most people neither interest rates nor asset prices are key to financial health — instead, it’s all about wages. And new research just posted on Vox, using time-series methods on micro data, finds that

the empirical evidence points toward monetary policy actions affecting inequality in the direction opposite to the one suggested by Ron Paul and the Austrian economists.

Which brings me back to the reason most of us favor QE. No, Janet Yellen and I aren’t secretly on the Goldman Sachs payroll. Nor do I (or, I suspect, Yellen) believe that unconventional monetary policy can produce miracles. The main response to a depressed economy should have been fiscal; the case for a large infrastructure program remains overwhelming.

But given the political realities, that’s not going to happen. The Fed is the only game in town. And you really don’t want to trash the Fed’s efforts without seriously doing your homework.

Krugman’s blog, 10/24/14

October 25, 2014

There were three posts yesterday.  The first was “The Invisible Moderate:”

I actually agree with a lot of what David Brooks says today. But — you know there has to be a “but” — so does a guy named Barack Obama. Which brings me to one of the enduringly weird aspects of our current pundit discourse: constant calls for a moderate, sensible path that supposedly lies between the extremes of the two parties, but is in fact exactly what Obama has been proposing.

So, David says that

The federal government should borrow money at current interest rates to build infrastructure, including better bus networks so workers can get to distant jobs. The fact that the federal government has not passed major infrastructure legislation is mind-boggling, considering how much support there is from both parties.

Well, the Obama administration would love to spend more on infrastructure; the problem is that a major spending bill has no chance of passing the House. And that’s not a problem of “both parties” — it’s the GOP blocking it. Exactly how many Republicans would be willing to engage in deficit spending to expand bus networks? (Remember, these are the people who consider making rental bicycles available an example of “totalitarian” rule.)

Also, there’s this:

the government should reduce its generosity to people who are not working but increase its support for people who are. That means reducing health benefits for the affluent elderly …

Hmm. The Affordable Care Act subsidizes insurance premiums for lower-income workers, and pays for those subsidies in part by eliminating overpayments for Medicare Advantage. So conservatives are celebrating both ends of that deal, right? Oh, wait, death panels.

It’s an amazing thing: Obama is essentially what we used to call a liberal Republican, who faces implacable opposition from a very hard right. But Obama’s moderation is hidden in plain sight, apparently invisible to the commentariat.

Well, Obama’s a socialist Kenyan usurper N[CLANG], after all…  Yesterday’s second post was “The Profits-Investment Disconnect:”

I caught a bit of CNBC in the locker room this morning, and they were talking about stock buybacks. Oddly — or maybe not that oddly, given my own experiences with the show — nobody brought up what I would have thought was the obvious question. Profits are very high, so why are companies concluding that they should return cash to stockholders rather than use it to expand their businesses?

After all, we normally think of high profits as a signal: a profitable business is one people should be trying to get into. But right now we see a combination of high profits and sluggish investment :

What’s going on? One possibility, I guess, is that business are holding back because Obama is looking at them funny. But more seriously, this kind of divergence — in which high profits don’t signal high returns to investment — is what you’d expect if a lot of those profits reflect monopoly power rather than returns on capital.

More on this in a while.

Yesterday’s last post was “Friday Night Gone:”

OK, this is weird. I posted Friday Night Music last night, or at least thought I did, and it’s gone — no post, not even a draft. I may try to reconstruct it later.

Krugman’s blog, 10/21/14

October 22, 2014

There was one post yesterday, “Fly the Derpy Skies:”

Last night Atif Mian and I flew up to Boston for a conference — and as I slid into my seat, who should I see staring at me but Ron Paul. It turned out that all of the seatback screens in the plane were showing Newsmax TV — who knew there was such a thing? Is it there to serve people who find Fox News too liberal? — and as best I could tell from the visual context (the sound was blessedly off), the elder Paul was lecturing us about monetary policy.

This sort of thing is obviously an important part of the reason we’re living in an age of derp. Events and data may have made nonsense of claims that the Fed’s policies would inevitably produce runaway inflation, and made those insisting on such claims look like fools; but there’s a large audience of people who, pulled in by affinity fraud, live in a bubble where they never hear about such evidence.

Truly, we live in a world in which people feel entitled not just to their own opinions but their own facts.

From the title I’m guessing he was flying United, but I do wish he had told us what airline he was on…

Krugman’s blog, 10/19/14

October 20, 2014

There was one post yesterday, “This Age of Derp:”

I gather that some readers were puzzled by my use of the term “derp” with regard to peddlers of inflation paranoia, even though I’ve used it quite a lot. So maybe it’s time to revisit the concept; among other things, once you understand the problem of derpitude, you understand why I write the way I do (and why the Asnesses of this world whine so much.)

Josh Barro brought derp into economic discussion, and many of us immediately realized that this was a term we’d been needing all along. As Noah Smith explained, what it means — at least in this context — is a determined belief in some economic doctrine that is completely unmovable by evidence. And there’s a lot of that going around.

The inflation controversy is a prime example. If you came into the global financial crisis believing that a large expansion of the Federal Reserve’s balance sheet must lead to terrible inflation, what you have in fact encountered is this:

I’ve indicated the date of the debasement letter for reference.

So how do you respond? We all get things wrong, and if we’re not engaged in derp, we learn from the experience. But if you’re doing derp, you insist that you were right, and continue to fulminate against money-printing exactly as you did before.

The same thing happens when we try to discuss the effects of tax cuts — belief in their magical efficacy is utterly insensitive to evidence and experience.

Now, not every wrong idea — or claim that I disagree with — is derp. I was pretty unhappy with the claim that doom looms whenever debt crosses 90 percent of GDP, and not too happy with the later claims that the relevant economists never said such a thing; that’s what everyone from Paul Ryan to Olli Rehn heard, and they were not warned off. But there has not, thankfully, been a movement insisting that growth does too fall off a cliff at 90 percent, so this is not a derp thing.

But there is, as I said, a lot of derp out there. And what that means, in turn, is that you shouldn’t pretend that we’re having a real discussion when we aren’t. In fact, it’s intellectually dishonest and a public disservice to pretend that such a discussion is taking place. We can and indeed are having a serious discussion about the effects of quantitative easing, but people like Paul Ryan and Cliff Asness are not part of that discussion, because no evidence could ever change their view. It’s not economics, it’s just derp.

Now, saying this brings howls of rage, accusations of rudeness and being nasty. But what else can one do?

Krugman’s blog, 10/18/14

October 19, 2014

There were three posts yesterday.  The first was “The Civility Whine:”

At this point in the great inflation-deflation debate, a lot of what the inflationistas have to say takes the form of whining about the rudeness of their critics — of course, me in particular. I would say that this is a de facto confession that they’ve run out of substantive defenses for their position — although I guess I would say that, wouldn’t I?

But there’s something else you should know: the inflation derpers aren’t just ignorant about monetary policy, they also don’t understand the rules of argument. In particular, the constant complaint about “ad hominem” attacks shows that they don’t know what that means.

I think the Wikipedia definition is pretty good: an ad hominem is

a form of criticism directed at something about the person one is criticizing, rather than something (potentially, at least) independent of that person.

So if, for example, somebody discussing my views on monetary policy refers to me as “Enron consultant Paul Krugman”, that’s ad hominem. But if I say that inflationistas have been

bobbing and weaving, refusing to acknowledge having said what they said, being completely unwilling to admit mistakes.

that’s really not ad hominem; I’m attacking how these people argue, not their personal attributes.

What about the lexicon we’ve developed over the course of the past few years — zombies, cockroaches, confidence fairies, derp? These are all terms directed at arguments, not people; no, I didn’t call Olli Rehn a cockroach, just his historically ignorant assertion that Keynes wouldn’t have called for fiscal stimulus in the face of high debt.

The point is that at no point, as far as I know, have I relied on personal attacks as a substitute for substantive argument. I never accuse someone of practicing derp without showing that he is, indeed, practicing derp.

Still, why use such colorful language? To get peoples’ attention, of course, and to highlight the sheer scale of the folly. And it’s working, isn’t it?

Now, the people who make zombie arguments and engage in derp feel deeply insulted by all of this. But if you’re going to engage in public debate, with very real policy concerns that affect the lives of millions at stake, you are not entitled to have your arguments treated with respect unless they deserve respect.

One more thing: I also don’t think that the derp brigade understands what it means to argue from authority. When I say that you shouldn’t opine on monetary policy unless you’re willing to invest some time on understanding the monetary debate, I am saying exactly that. I’m not saying that you need a Ph.D. or a chair at a fancy university; I’m saying that you need to do your homework.

In a better world, none of this would be relevant. Policy disputes would be based on defensible, well-informed positions, on which reasonable people could disagree, and people who were proved wrong would acknowledge that fact and revise their views. Also, everyone would get a pony.

Phooey on the pony.  I want a unicorn.  His second post yesterday was “Why to Worry About Deflation:”

David Wessel has a very nice explainer in the WSJ — although I wonder how the editor allowed his citation of a particular expert under point #2 to slip through. One thing he doesn’t do, however, is make it clear that zero is not a magic red line here — as even the IMF has made a point of emphasizing, too-low inflation has all the adverse effects of outright deflation, just to a lesser degree.

Most notably, the euro area currently has 0.8 percent core inflation, far below its 2 percent target, which is itself too low. This means that Europe is already in a lowflationary trap, qualitatively the same as a deflationary trap.

Yesterday’s last post was “Friday Night Music, Saturday Night Followup:”

Last week I highlighted the Sarah Jarosz/Milk Carton Kids matchup; just saw them live, and it was better than I could have imagined — the chemistry among the musicians was amazing, and they’re lovely people too. So catch them if you can …

 

Krugman’s blog, 10/17/14

October 18, 2014

There were three posts yesterday.  The first was “La Vie En (Charlie) Rose:”

My head talks about my Rolling Stone defense of Obama.

The second post yesterday was “Inflation Derp Abides:”

Via Business Insider, Zero Hedge directed its readers to an “excellent interview” in which Jim Rogers declared that “we are all going to pay a terrible price for all this money-printing and debt.” And I asked the obvious question: How long has Rogers been predicting a printing-press-and-deficits disaster?

The answer is, a very, very long time. Here he is in October 2008 — six full years ago — declaring that we were setting the stage for a “massive inflation holocaust.”

Now, you might have thought that after years of being completely wrong (with a diversion into inflation trutherism), one of two things would happen: 1. Rogers would question his own premises 2. People would stop taking his views on macroeconomics seriously.

But no. His views haven’t changed (and given what we’ve seen from others of similar views, he would deny that anything was amiss with his predictions); and he’s still treated by financial media as a source of deep wisdom.

The ability of inflation derp to persist, even flourish, in an age of disinflation remains remarkable.

Yesterday’s last post was “Friday Night Music: Lucius Covers the Kinks:”

Can there be too much Lucius? Not to my taste. And the band does want people to know that they have released a special enhanced version of their album, with a bunch of bonus tracks including live performances (which is where they really shine). And here’s something unusual: a live performance video assembled from videos taken from many people who were there. If this doesn’t make you smile, I feel sorry for you:

 

Krugman’s blog, 10/15/14

October 16, 2014

There were two posts yesterday.  The first was “1937:”

From the beginning, economists who had studied the Great Depression warned that policy makers needed, above all, to be careful not to pull another 1937 — a reference to the fateful year when FDR prematurely tried to balance the budget and the Fed prematurely tried to normalize monetary policy, aborting the recovery of the previous four years and sending the economy on another big downward slope.

Unfortunately, these warnings were ignored. True, the Fed at least stood up to the inflationistas demanding tighter money now now now; but its actions were at the least hobbled by the chorus. The ECB actually did raise rates for a while, as did the Riksbank in Sweden. And fiscal austerity driven by fear of the invisible bond vigilantes (and justified by faith in the confidence fairy) was the norm everywhere, although worse in Europe.

And now things are sliding everywhere. Actually, Europe already had one 1937, with its slide into a double-dip recession; but now it’s very much looking like another. And the world economy as a whole is weakening fast.

So now we have another milestone: Earlier today the 10-year yield dropped below 2 percent. It’s up again slightly as I write this, but all the market signals are saying that once again the big risk is deflation or at least very sub-par inflation.

I hope that the Fed will stop talking about exit strategies for a while. We are by no means out of the Lesser Depression.

Yesterday’s second post was “Inequality Explained:”

Too busy to post much substantive today, so here’s a very nice lecture by Janet Gornick of CUNY — who runs the Luxembourg Income Study, and who is my current associate and future colleague — at the UN:

 https://link.brightcove.com/services/player/bcpid1722935254001/?bctid=3826056194001&autoStart=false&secureConnections=true&width=480&height=270

(For some reason there’s no embed code I could find for this video…)

Krugman’s blog, 10/14/14

October 15, 2014

There were three posts yesterday.  The first was “Jean Tirole and the Triumph of Calculated Silliness:”

I’m late coming in on the Tirole Nobel – busy with real life – and many people have already weighed in on his contribution. But I though I might still have something useful to say about what the New Industrial Organization, of which he was the most important figure, actually did – namely, it made it safe to be strategically silly, to the great benefit of economics.

What do I mean by that? Before the new IO, economists wrote about perfect competition and monopoly, then acknowledged (if they were honest) that most of the real economy seemed to consist of oligopoly – competition among the few – but did little there except some hand-waving. Why? Because there was no general model of oligopoly.

And there still isn’t. When you have a small number of players, each able to have a significant effect on prices, lots of things can happen. They can collude – maybe implicitly, if there is an effectively enforced antitrust law; but what are the limits of collusion, and why and when does it sometimes break down? We like to assume that firms maximize profits, but what does that even mean when there are small-group interactions that create prisoners’-dilemma-type situations?

And yet you do want to model the economy, to think about stuff – and sometimes that stuff can’t be modeled without addressing imperfect competition. That was very much the case in my home field of trade, where even trying to model the role of increasing returns meant dealing with the fact that increasing returns internal to firms must cause perfect competition to break down.

Before the new IO came along, the way economics dealt with such issues was to assume them away. Increasing returns as a cause of trade? Hey, you can’t deal with that because we don’t have a theory of imperfect competition, so we have to assume that it’s all comparative advantage. (Harry Johnson once wrote a more or less triumphant paper to that effect.) Investment in R&D, and the temporary market power that results, as a source of technological progress? No can do.

What new IO brought was not so much a solution as an attitude. No, we don’t have a general model of oligopoly – but why not tell some stories and see where they lead? We can simply assume noncooperative price (or quantity) setting; yes, real firms are probably going to find ways to collude, but we might learn interesting things by working through the case where they don’t. We can make absurd assumptions about tastes and technology that lead to a tractable version of monopolistic competition; no, real markets don’t look like that, but why not use this funny version to think about increasing returns in trade and growth?

Basically, the new IO made it OK to tell stories rather than proving theorems, and thereby made it possible to talk about and model issues that had been ruled out by the limits of perfect competition. It was, I can tell you from experience, profoundly liberating.

Of course, there came a later phase when things were too liberated – when a smart grad student could produce a model to justify anything. Time for empirical work! But by then a lot had been achieved.

Yesterday’s second post was “The State of Macro, Six Years Later:”

Olivier Blanchard has gotten a lot of ribbing, from me among others, for his 2008 paper proclaiming that “the state of macro is good.” My critique was that Olivier was in a state of denial about the Dark Age of macroeconomics; when crisis struck and action became necessary, it became all too clear that freshwater macro had unlearned everything Keynes and Hicks had taught – and also that the desperate New Keynesian attempt to appease the rational expectations crowd had not only failed in that purpose, but arguably hobbled efforts to think clearly about anything that didn’t fit easily into a model where everything except price stickiness reflected maximization..

I would argue that Olivier’s latest version, which concedes that there are “dark corners” where the rational expectations approach doesn’t work, is still trying too hard to appease the unappeasable. But Arnold Kling offers a different critique: he thinks that Blanchard is demonstrating “modeling hubris.” And that, I’d argue, is all wrong.

First of all, whenever somebody claims to have a deeper understanding of economics (or actually anything) that transcends the insights of simple models, my reaction is that this is self-delusion. Any time you make any kind of causal statement about economics, you are at least implicitly using a model of how the economy works. And when you refuse to be explicit about that model, you almost always end up – whether you know it or not – de facto using models that are much more simplistic than the crossing curves or whatever your intellectual opponents are using.

Think, in particular, of all the Austrians declaring that the economy is too complicated for any simple model – and then confidently declaring that the Fed’s monetary expansion would cause runaway inflation. Whatever they may have imagined, they were in practice using a crude quantity-theory model of the price level.

And as I have often tried to explain, the experience of the past six years has actually been a great vindication for those who relied on a simple but explicit model, Hicksian IS-LM, which made predictions very much at odds with what a lot of people who didn’t use explicit models were sure would happen.

Suppose that you didn’t know about IS-LM and the concept of the liquidity trap. You would (and many did) look at the growth of the monetary base, and predict huge inflation:

And you could (and many did) look at government borrowing, and predict soaring interest rates:

But if you understood IS-LM, you realized that both the relationship between money and inflation and the relationship between borrowing and interest rates break down at the zero lower bound; and so they did.

If you don’t think these successful predictions are a big deal, go back and read the dismissive, vituperative comments those of us who predicted low inflation and interest rates faced back in 2009.

And a somewhat related point: when people claim to have a sophisticated understanding that transcends models, what, exactly, would they ever regard as evidence that their sophisticated understanding is, you know, wrong?

The last post yesterday was “Nobody Understands the Liquidity Trap: Cliff Asness Edition:”

Cliff Asness, one of the signers of the infamous open letter warning Ben Bernanke that his policies risked debasing the dollar, weighs in with a complaint that I am being a big meanie. As Brad DeLong immediately notes, what Asness mainly ends up doing is showing that he doesn’t at all get the whole notion of the liquidity trap, and the resulting irrelevance of monetary expansion to both prices and output.

Clearly, Asness has never read anything at all on the subject — not what I’ve written, not what Mike Woodford has written, not what Ben Bernanke has written. And he seems to view the failure of inflation to follow from quantitative easing as some sort of weird coincidence, not what anyone who applied basic macroeconomics to the situation predicted.

Now, I understand that busy people can’t keep track of everything, and even that you can sometimes be a successful money manager without reading up on monetary economics. But if you’re one of those people who don’t have time to understand the monetary debate, I have a simple piece of advice: Don’t lecture the chairman of the Fed on monetary policy.


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