Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 4/17/14

April 18, 2014

There was one post yesterday, “What Eight Million Means:”

Sorry about blog silence — real life intruded, plus I did have to write a column. But I shouldn’t let the day pass without mentioning the latest big Obamacare news. Final enrollment for 2014, we now know, will be more than 8 million. The age mix has also improved, with more young people signing up at the end; as Jonathan Cohn points out in the linked article, the age mix in Obamacare’s first year is now just about identical to the age mix in Romneycare’s first year. Goodbye, death spiral.

How did enrollment manage to surge so impressively despite the initial debacle of healthcare.gov? Obviously they fixed the website; but the broader issue, as Sarah Kliff rightly points out, is that being uninsured is truly terrible. Uninsured Americans really, really wanted coverage, and they weren’t ready to give up.

Kliff doesn’t make this point too explicitly, but this diagnosis has another crucial implication: the benefits of Obamacare, for all its imperfections, are immense. Millions of people who lived extremely anxious lives now have far more security than before. Compared with those benefits, the complaints of some already insured people that they have less choice of doctors than before, or that they’re no longer allowed to retain minimalist plans, look like whining. (And of course not one of the more serious-sounding stories about soaring premiums and all that has held up under scrutiny.)

And speaking of whining, the GOP response seems to be to make every possible insinuation to the effect that the numbers are somehow fraudulent. I actually don’t think there’s a game plan here; their whole position was premised on the inevitable collapse of health reform, and they have no plan B.

All around, as Cohn says, a very good day for reform.

Krugman’s blog, 4/16/14

April 17, 2014

There were three posts yesterday.  The first was “Piketty Day at the Graduate Center:”

A talk by Thomas Piketty at the CUNY Graduate Center, followed by a panel discussion with Steve Durlauf, Joe Stiglitz, and somebody else. Starting at 6 PM; live streaming here.

Yesterday’s second post was “Piketty Day Notes:”

I’m going to be commenting on Thomas Piketty later today, and I thought I would write up my thoughts in advance; this may or may not be what I actually end up saying.

There’s obviously a lot to be said about the substance of Piketty’s book, and there will be many more research papers inspired by his work. What I want to do, however, is go somewhat meta, and talk about how Piketty fits into the ongoing debate over the nature and implications of rising inequality — and why “Capital in the Twenty-First Century” is having such a big impact.

So here’s my diagnosis of why “Capital” is so big: Piketty offers the latest and most damning in what have been a series of “Oh, yeah? Guess what” moments.

In the first stage of the debate over inequality, there was widespread denial that rising inequality was even happening on any major scale. Actually, there still is — in this debate, in which one side is sustained by vast amounts of money and influence with an interest in obfuscation, refuted arguments are never abandoned; they just keep coming back. No point is ever conceded by the apologists. But it was nonetheless true that by sometime in the early 90s you could mostly say, “Oh, yeah? Guess what.” The evidence for a sharp rise in inequality, a definitive break with the three postwar decades, was overwhelming.

For a long time thereafter, however, the apologists had a fallback position: OK, maybe inequality was rising, but it wasn’t the rich versus everyone else — it was the whole top quintile, basically well-educated Americans, on the relative rise. So it nothing like the kind of class divisions of the past. The truth is that we knew better than that even by the late 1980, but even a few years ago you still found the voices of respectable opinion insisting that inequality was about the 20 percent, not the one percent.

But at a certain point — to a large extent thanks to Piketty and Emmanuel Saez — we got to say “Oh, yeah? Guess what.” Actually, rising inequality was in large part about the rise of a tiny elite, the one percent and within that the 0.1 percent.

Oh, and to those who admitted some rise in inequality but declared that it was nothing like the Gilded Age, the answer was, “Oh, yeah? Guess what.” We don’t have Gilded Age survey data, but we do have tax records back to the early 20th century, and top income shares are right back at late-Gilded-Age levels.

This brings us to the latest fallback position of inequality’s apologists, one that has lately been associated in particular with Greg Mankiw — namely, that maybe the one percent have been thriving, but they earned it. After all, we’re talking about self-made men here, not heirs to inherited wealth, right?

Now, this is actually a very weak argument on multiple levels. Although the apologists love to talk about movie actors and sports stars, the highest incomes in America overwhelmingly go to executives, whose contributions to the economy are largely in the eyes of the beholder. And anyway, marginal product isn’t moral justification; even if you believe that, say, Sandy Weill was so much better than the next best alternative that his earnings reflected his true contribution to GDP, that says nothing about whether it was fair or just for him to keep so much more of those earnings than he would have been able to if 1960s tax rates were still in effect.

But in any case, the presumption here is that modern wealth is self-made, nothing like the inherited fortunes of ol. And you know the reply: “Oh, yeah? Guess what.” What Piketty shows is that inherited wealth has been making a comeback, that it’s already a much bigger factor than most people even on the left realize, and that it’s on track to become much larger still.

And this really is a revelation. Piketty’s literary sources are Jane Austen and Balzac; our modern conceptions, even among liberals worried by rising inequality, tend to be shaped by the likes of Oliver Stone. Yet it turns out that Gordon Gekko is an increasingly outmoded archetype. Yes, he’s a predator — but he’s very much a self-made predator. And while those people still exist, the economic elite is increasingly made up of their sons and daughters. As I’ve noted, six of the ten wealthiest Americans, according to Forbes, are Walton and Koch heirs; further down the list are a lot of old men, who will soon be passing their wealth on.

This brings me to my second point about Piketty, which is that his work greatly reinforces the notion that we may face a political-economy spiral of inequality, in which great wealth brings great power, which is used to reinforce the concentration of wealth. That was a concern even when we thought we were facing a one-generation dispersion of economic success. But it becomes much more of a concern when one realizes that we’re talking about creating an environment favorable to “patrimonial capitalism”, of sustained dominance by family dynasties.

And let me say that while the core of Piketty’s work is his economic analysis, his discussion of the political economy of dynastic wealth is a major additional highlight. I was especially struck by the somewhat paradoxical contrast between Belle Epoque France and Gilded Age America: a notionally egalitarian society in which anything that might challenge the privileges of inherited wealth was beyond the pale, versus a society that celebrated financial success but in which it was considered reasonable and respectable to advocate high taxation for the explicit purpose of reducing inequality. It seems to me that we want some real scholarship — from political scientists, not (or not just) economists — to figure out that contrast, and learn lessons that might help us break the cycle of rising dynastic power we face today.

OK, that’s my meta analysis of why Piketty has made such a splash. But let me conclude by saying something about why I was so bowled over by this book. Obviously I share the widespread sense that we’re learning something very important about the past and future of inequality. But there’s something else: this analysis isn’t just important, it’s beautiful. Piketty gives us something we didn’t know we needed — a sweeping, elegant integration of growth theory, the factor distribution of income, and the personal distribution of income and wealth. He even (in work linked to but not presented in the book) shows how to derive the power laws that we know govern the distribution of income and wealth at the top, and shows how r-g determines the crucial exponents.

And my admiration is only reinforced by my sheer, green-eyed professional jealousy. What a book!

The last post yesterday was “Obamacare Truthers at MSNBC:”

Just a quick note in support of government statisticians. They do an incredibly important job, and by and large do it very well. They’ve also maintained a well-deserved reputation for staying out of the political fray, of acting as civil servants, not party apparatchiks.

You can argue that the Census decision to change its health-insurance questionnaire starting with the 2013 data wasn’t such a good idea — in fact, I know a number of health care experts who are dismayed. But it’s really quite vile to have talk-show hosts who quite literally know nothing about the field, other than that they’re against covering the uninsured, casually accusing Census of “cooking the books” to support Obamacare.

But remember, MSNBC is the liberal network, right? Why don’t they just hire Donald Trump and be done with it?

Krugman’s blog, 4/15/14

April 16, 2014

There were three posts yesterday.  The first was “Rising Sun:”

Joe Romm draws our attention to the third slice of the latest IPCC report on climate change, on the costs of mitigation; the panel finds that these costs aren’t that big — a few percent of GDP even by the end of the century, which means only a trivial hit to the growth rate.

At one level this shouldn’t be considered news. It has been apparent for quite a while that given the right incentives we could maintain economic growth even while greatly reducing greenhouse gas emissions. But there is, in fact, some news that greatly strengthens the case that saving the planet would be quite cheap.

First, a word about the general principle here. Actually, for once I get to play “balanced” journalist, and bash both left and right. For there are some people on the left who keep insisting that economic growth is incompatible with reduced emissions, and that therefore we have to turn our backs on growth. Such people have no power, and therefore don’t do any real harm. Still, it’s worth pointing out that they have a much too narrow notion of what it means to have a growing economy. It doesn’t necessarily mean more stuff! It could be better stuff, or more services — and there are also choices to be made in how we produce and distribute stuff. There is absolutely no reason to believe in a one-for-one link between real GDP and greenhouse gases.

As a practical matter, the fallacies of the right are much more important — indeed, they may destroy civilization. What’s notable about right-wing commentary on the economics of emission reduction is how people on that side suddenly seem to change their views about the effectiveness of markets. Normally they extol the magic of the marketplace, which can brush aside all limits; but somehow they simultaneously believe that markets would be totally unable to cope with a carbon tax or a cap-and-trade system. Scarce resources are no problem; limited rights to pollute are catastrophic. It’s not hard to see the ulterior motives here, but it’s still peculiar.

In fact, you should be optimistic about the ability of a market economy to reduce emissions given the incentives. And now we know something new: the technological prospects for a low-emission economy have gotten dramatically better.

It’s kind of odd how little attention the media give to the solar revolution, but this is really huge stuff:

In fact, it’s possible that solar will displace coal even without special incentives. But we can’t count on that. What we do know is that it’s no longer remotely true that we need to keep burning coal to satisfy electricity demand. The way is open to a drastic reduction in emissions, at not very high cost.

And that should make us optimistic about the future, right? I mean, all that stands in our way is prejudice, ignorance, and vested interests. Oh, wait.

Yesterday’s second post was “Supply, Demand, and Unemployment Benefits:”

Ben Casselman points out that we’ve had a sort of natural experiment in the alleged effects of unemployment benefits in reducing employment. Extended benefits were cancelled at the beginning of this year; have the long-term unemployed shown any tendency to find jobs faster? And the answer is no.

Let me parse this a bit more, and ask, how was it, exactly, that reduced benefits were supposed to encourage employment in the first place?

Making the unemployed miserable arguably increases labor supply, as workers become less choosy and more willing to take whatever job they can find. But the US labor market in 2014 isn’t constrained by supply, it’s constrained by demand: given what firms can sell, they have no need for as many hours of work as workers are willing to give.

So make the long-term unemployed more desperate; so what? They can’t do anything to increase the amount of work demanded, and in fact their reduced purchasing power reduces labor demand.

You might imagine that the long-term unemployed, through their desperation, might take jobs away from existing workers — but it’s not easy to see how that might work, and there’s no evidence that this is happening.

So the point is that as long as you understood that we have a demand-constrained economy, you knew that cutting off the unemployed would produce all pain, no gain. And your prediction was right.

Oh, and this constitutes another source of evidence that the “regular economics” extolled by Barro and others — that is, economics in which unemployment benefits must reduce employment because they’re “paying people not to work” — is just wrong in a depressed economy.

The last post yesterday was “Blaming the Messengers, Euro Edition:”

Aha. I missed this, from Jürgen Stark, which is one of the most amazing things I’ve ever seen written by a former central banker:

It is likely we are living in an extended period of price stability. This is good news. It boosts real disposable income and will eventually support private consumption. Inflation expectations are well anchored, and there is no evidence households and companies are delaying purchases because of negative expectations. Warnings about outright deflation and calls for ECB action are misguided and irresponsible. The longer this discussion continues, and the more intense it becomes, the more likely the risk of a self-fulfilling prophecy.

So, Stark begins by asserting that low inflation boosts real disposable income. That’s a zero-credit answer on any undergraduate exam: yes, low inflation makes income gains higher for any given rate of increase in nominal income, but low inflation reduces the rate of nominal income growth one for one. The notion that an influential former monetary official doesn’t understand this is breathtaking.

Now, it’s not true that low inflation has no effect; it increases the real value of debt, which is contractionary because debtors cut spending more than creditors raise it, and it raises real interest rates when nominal rates are near the zero lower bound. But these are both demand-depressing effects.

Oh, and low overall European inflation makes the adjustment problem of debtor countries much worse, which Stark doesn’t even mention.

But the real kicker is the claim that even talking about the possibility of deflation is irresponsible, because that can turn into a self-fulfilling prophecy. That’s right: if inadequate ECB action leads Europe into a Japan-style lost decade or two, it’s the fault of all those critics who warned that this might happen; if only everyone had kept clapping, everything would have been OK.

I can understand why some policymakers would like to live in a world like that — a world in which, if critics say that their policies will fail, and then they do fail, it’s the critics’ fault. But it’s hard to imagine the state of mind of someone who would actually state that view in the FT.

Krugman’s blog, 4/14/14

April 15, 2014

There were two posts yesterday.  The first was “Obamacare, The Unknown Ideal, Continued:”

The current state of public opinion on health reform is really peculiar. If you’ve been following the issue at all closely, you know that the Affordable Care Act is one of the great comeback stories of public policy: after a terrible start, it has dramatically exceeded expectations. But hardly anyone seems to know that.

It’s easy to understand how that happens for Fox-watchers and Rush-listeners, who are fed a steady diet of supposed Obamacare disaster stories. Remember this?

But the real story hasn’t even gotten through to many people who should know better.

Over the weekend I had dinner in NYC with some very smart, sophisticated people; yes, all of them liberals. And almost everyone in the group was under the impression that Obamacare is still going badly — they wanted me to tell them whether it could still be turned around.

Meanwhile, New York (which created its own exchange) is a huge success story: enrollment is 60 percent higher than federal projections, premiums have been cut in half.

An aside: New York was already a community-rating state, where insurers weren’t allowed to discriminate based on medical history. But the result of that system was that healthy people tended to stay out of the individual market, creating a bad risk pool that drove up rates. Now everyone has to be in, dramatically improving the risk pool. As such, the New York experiences demonstrates the essential role of the individual mandate for reform.

But anyway, back to the mystery: here we have smart, pro-reform people living in a state where reform is going really well. And they don’t know it!

In part this may reflect the Obama administration’s lackluster job so far in getting the word out. But it also, I think, reflects a persistent anti-ACA tilt in news coverage. In the final days of March I wrote about the de facto blackout on the obvious surge in enrollments; if you weren’t reading Charles Gaba and/or bloggers who followed him, you were in the dark about a huge developing story. And this tilt has continued.

Just FYI: the article I linked above, about the spectacular success of New York reform, was on page A16 …

Yesterday’s second post was “Interest Rates and the Budget Outlook:”

The CBO has issued its latest budget update, and as always it’s a very careful piece of work. But there is one thing really worth drawing attention to — not that the CBO is necessarily wrong, but it might be, and at any rate people should be aware of what’s driving the conclusions.

Here it is: the CBO’s projection has deficits quite low in the near term, but starting to widen a few years from now. What’s driving that move toward deficit? To an important extent it’s interest payments, which CBO has rising from 1.3% of GDP in 2014 to 3.3% of GDP in 2024.

Well, that’s what happens when you have ever-growing debt, right? The more you owe, the bigger the interest payments, and up it spirals, right?

Wrong.

CBO has debt rising only slightly as a share of GDP, from 74 percent in 2014 to 78 percent in 2024. Essentially all of that rise in interest burden reflects the assumption that the federal government’s borrowing costs will rise sharply as the economy normalizes. But meanwhile we have another careful organization, the IMF, declaring that there is a long-term downward trend in real interest rates, that secular stagnation is a real risk, and that rates not much higher than what we see now may be the new normal.

Who’s right? I’m with the IMF, but they and I could be wrong. The key point for now, however, is that the CBO hasn’t exactly found that deficits will start to rise in a few years; it has essentially assumed that they will rise, because it assumes that interest rates will rise much more than many economists, including those at the IMF, believe.

Krugman’s blog, 4/13/14

April 14, 2014

There were two posts yesterday, one from a guest poster.  The first post was “ECO 348, The Great Recession:  Unemployment, Structural or Cyclical?”:

Slides here (pdf).

The second post was “Legal But Not Fair (Hungary):”

A new post from my Princeton colleague Kim Lane Scheppele, about how 45 percent of the popular vote turned into a two-thirds supermajority for Fidesz.

Legal but not Fair: Viktor Orbán’s New Supermajority

Kim Lane Scheppele
Princeton University and Institute for Advanced Study, Princeton

with Miklós Bánkuti in Princeton and Zoltán Réti in Budapest*

13 April 2014

Viktor Orbán and his Fidesz party coasted to a clear victory in last weekend’s Hungarian election, as expected. The governing party got 45% of the vote, but the new “rules of the game” turned this plurality vote into two thirds of the seats in the parliament. A continuing two-thirds parliamentary majority allows Orbán to govern without constraint because he can change the constitution at will. But this constitution-making majority hangs by a thread.

Orbán’s mandate to govern is clear because his party got more votes than any other single political bloc. What is not legitimate, however, is his two-thirds supermajority. Orbán was certainly not supported by two-thirds of Hungarians – nowhere close. In fact, a majority gave their votes to other parties. Orbán’s two-thirds victory was achieved through legal smoke and mirrors. Legal. But smoke and mirrors.

The International Election Observer Mission of the Organization for Security and Cooperation in Europe was extremely critical of the election. The election monitors found that in many different ways “[t]he main governing party enjoyed an undue advantage.” They reported numerous violations of international standards, including a failure to separate party and state, a biased media environment, a partisan Electoral Commission, lack of transparency in determining the electoral districts, and a generally un-level playing field. These, too, contributed to Orbán’s success.

In this post, I will explain why a plurality result in the polls turned into a constitutional supermajority and why that supermajority is due more to Fidesz’s self-dealing than to popular will. I will also show that Fidesz’s supermajority was so close that it depends on every one of the new tricks that the party inserted into the electoral system to benefit itself. One seat less, and the supermajority would be gone.

In saying that Orbán’s supermajority is illegitimate, I am not arguing that Orbán simply stole the election. No other party came close to Orbán’s 45% of the vote, though when you exclude the new Hungarian citizens from the neighboring countries – people who don’t actually live in Hungary and probably never have – Orban’s support drops to 43.5% among domestic voters.

The left alliance, a collection of five parties with the Socialists in the lead, received only 26% of the vote. It evidently failed to capture the public imagination and capitalize on the fact that about half of the voters wanted a change of government. Jobbik, a far-right party, won a shocking 21% of the vote, up more than 3% from its already large 2010 showing, making it the most successful far-right party in the European Union. The tiny, vaguely Green (but mostly vague) party LMP just barely squeaked over the 5% threshold to enter the parliament.

Orbán’s parliamentary two-thirds hides a complex set of calculations that depends on many factors. The Hungarian election system is fiendishly complicated. The bottom line is that the “two thirds mandate” includes far less popular support than one would guess given its size and far more legal trickery than a democratic government should be permitted to use. Orbán’s parliamentary majority may have been earned, but the supermajority mandate was not.

That said, Fidesz would probably have won a majority in parliament no matter what sort of electoral system Hungary had. Most mixed electoral systems like Hungary’s top up large pluralities into majorities. Also, many governments – if they can – attempt to shape the rules to aid their own reelection. Some tweaking of the electoral rules to favor the party in power is regrettable but normal.

But the Orbán government went well beyond normal tinkering when it extensively revised the electoral framework during its last four years in office. The new system was designed precisely to give Orbán a vastly disproportionate two-thirds parliamentary majority with less than a majority vote. And it worked.

The international election monitors were not impressed with the new system. They concentrated primarily on evaluating the campaign and the election itself, as we will see later, but they also expressed concern about the election framework and how it had been adopted. As the election monitors noted, the governing party’s “undue advantage” resulted in part from a “legal overhaul” that was “unprecedented” and consisted of laws that were “passed and modified without public consultation or inclusive dialogue with opposition parties.” They found that “[t]he manner in which these laws were adopted and frequently amended, including in the year prior to these elections, led to legal uncertainty and did not provide for effective and inclusive public consultation, contrary to national legislation and good practice.” The election observers concluded that the legislative process used to adopt the new electoral framework “undermined support and confidence in the reform process.”

While written in the diplomatic language characteristic of international reports, this is a serious condemnation.

How did this legal overhaul produce the 2014 election result? It manufactured the appearance of another landslide for Orbán, a landslide that did not occur.

In fact, Orbán’s victory disguised a growing weakness in his appeal to Hungarian voters. Between the 2010 and 2014 elections, Orbán lost a substantial fraction of his supporters. In 2010, Fidesz received more than 2.7 million votes while in 2014 the party won less than 2.3 million. This 16% drop in the total number of Fidesz voters was produced by one of the lowest turnouts in the post-communist period, combined with an 8% decline in the party’s overall support among those who voted. In fact, the three lowest turnout elections since communism ended were the three that Orbán won: 1998, 2010 and 2014.

These numbers mask the even more dramatic decline in Orbán’s popularity at home because they include new citizens in the neighboring states to whom the 2012 Fidesz constitution granted citizenship. The new citizens who voted for the first time this year are a formidable force since they voted 95% for Fidesz.

But these new citizens were not eligible to vote in 2010 so we should compare Orbán’s support in 2010 and 2014 without them. Among domestic voters, Orbán received only 2.1 million votes this time, losing 21% of the voters that had supported him in 2010. His party list vote slipped by 9% in this group as well.

Fidesz lost more than one fifth of its domestic voters overall in part because of the lower turnout, but the far-right Jobbik party and the left alliance both gained voters, as the chart below indicates.

The depressed turnout and yet the increased success of the two other major parties show Orbán’s weakness despite his huge parliamentary majority. Overall, 37% of voters stayed away from the polls, 35% voted for other parties, and only 28% of Hungarians actually cast an affirmative vote for Fidesz (including the “over the borders” voters).

If you consider only those who went to the polls, leaving aside the possibility that the low turnout is itself a signal of Orbán’s weakness, 51% voted for the three other parties that entered the parliament while 45% voted for Fidesz. And yet 51% of voters will get only 33% of the seats. And Orbán will get his two-thirds.

How is it possible for only 45% of the vote to turn into a two-thirds parliamentary mandate? Orbán’s “two-thirds” was enabled by a series of tricks that were legal, but not fair.

(To follow the analysis, you need to know that Hungarians cast two votes at a parliamentary election, one for a representative from their home constituency and one for a party. Fidesz got 45% of both the constituency and the party votes.)

Orbán’s electoral system had the overall effect of creating a huge disparity in how many votes each party needed to gain a parliamentary seat. If you add all votes (party list and constituencies together) and divide them by the number of seats each party actually got in this election, you can see that not all votes were equal in securing representation in parliament. A simple formula describes how many votes for any other party it would take to generate the representation in parliament that one vote for Fidesz did:

1 Fidesz vote = 2.1 left alliance votes = 2.6 Jobbik votes = 3.1 LMP votes

In short, the Fidesz seats were acquired with many fewer votes the others.

In an earlier set of blog posts, I explained the new election system in detail. Now that we have election results, we can see how the different parts of the remodeled election system worked to generate this two-thirds parliamentary mandate.

In my earlier analysis, I alleged that the new electoral districts had been gerrymandered to produce winning results for Fidesz. It’s true that the parliament was reduced in size from 386 seats to only 199, so the districts had to be redrawn. Moreover, the old districts were massively unequal, so the Constitutional Court had required that they be made more equal in size. But neither the smaller parliament nor the more equal districts required gerrymandering.

How can one tell if a district has been gerrymandered? There are many ways to gerrymander by drawing the precise boundaries of districts to achieve a particular result. The full effects are hard to tell without better data than we have.

But the new districts are highly unequal in size, which gives us a way to test for gerrymandering. A gerrymanderer not constrained by the need for strictly equal districts would make the districts of his opponents systematically larger than the districts where his own voters dominate. In larger districts, it takes more votes to elect an MP, so each vote counts less. If the “left” districts are systematically larger than the “right” districts, that is evidence of conservative gerrymandering.

The relationship between district size (here measured by the number of voters who actually voted in each district) and partisanship (measured by the percentage of the vote that went to the left alliance and LMP combined) is substantial. As one would expect in a system gerrymandered to benefit the right wing of the political spectrum, the more left-leaning a district is, the more voters it has. In fact, the explained variation (R-squared) is 37%. In social science, it’s a huge effect when one variable accounts for more than one-third of the variation in another.

The system is in fact much more biased against left voters than the one it replaced. Calculated using the 2010 districts and voting data, the same model (votes for the left v. # of votes in a district) explained less than 2% of the variance (R-squared = .019), as the figure below indicates.

The old districts were much more unequal in size (which was a problem) but they were not nearly as politically biased, as the nearly flat regression line shows. The new districts are still highly unequal in size. But now they are strongly biased against the left. This is what a gerrymander looks like.

There’s another aspect to the gerrymander that we can also see clearly. In the old parliament, more mandates were determined by the list votes than by individual constituencies. (The pre-2014 system was also disproportionate, but less so.) List votes which are distributed over a set of candidates are more proportional than individual constituencies which are generally more disproportionate because only one candidate can win. In the new parliament, the relative proportions of list and constituency mandates are reversed, so that now 106 of the seats are determined by the individual constituencies and 93 come from the party lists. This makes the effect of the gerrymandered districts bigger in the overall calculation of parliamentary mandates.

Fidesz won 45% of the votes in the individual constituencies in 2014 and yet got 88% of the seats. The effects of the gerrymander, even on the rough analysis above, assisted massively in producing such a disproportionate effect.

Recall that Fidesz unilaterally set the boundaries of all of the districts in a law requiring a two-thirds vote, and did so without allowing the opposition to have any input at all. As the international election monitors noted in their post-election report, “The process of delimitation of constituencies was criticized . . . for lacking transparency and inclusive consultation.” While the election law required that districts vary by no more than 15% above and below the national average, the election observers noted that districts still fell outside this wide margin. As we can see, that gave more room for the gerrymanderers to play with the district composition.

While gerrymandering is probably the single biggest trick that converted Orbán’s plurality to a supermajority, Orbán’s supermajority is built from many different sleights of vote. In my earlier analysis, I showed how the parties on the left were forced to work together for many different reasons ranging from the elimination of the second round of voting in individual constituencies to the novel system of compensatory mandates on the party-list side. Because the new “first past the post system” of individual constituencies was designed to reward the largest single party, it was important for the fragmented and fractious left to unite to win.

Five of the parties on the left eventually forged an alliance with each other to overcome the bias against small parties built into the system. The alliance groups squabbled and quite visibly hated working together, which no doubt suppressed the vote they got. Together, they won only 10 of the 106 individual constituencies with their 26% of the constituency vote. But they would surely have lost almost every single constituency if they hadn’t joined together.

As predicted, party fragmentation had huge effects. Had the alliance had managed to attract to its ranks just one more party, the LMP, the number of individual constituencies that a six-party alliance would have gained would have more than doubled – from 10 to 21. Even this small division in the left opposition cut in half the number of individual mandates that the left won. That’s a powerful effect of the system.

LMP had its own reasons to stay outside the alliance, and it guessed correctly that it could (barely) get its own parliamentary fraction by doing so. But if it had joined with the alliance, the left opposition together would have gained an additional 11 district mandates instead of the five that LMP got from its list votes, for a net gain of six.

(The individual constituencies where the Alliance + LMP > Fidesz are Budapest districts #1, #2, #4, #6, #12, #13, #15, #18; Baranya districts # 1 and #2; Szabolcs-Szatmár-Bereg district #1 as you can see here.)

Many mixed electoral systems allow the “unused votes” won by losing candidates to be added to their party-list totals when the list mandates are calculated, so I will call that “normal compensation.” Normal compensation is the tool through which mixed systems become more proportional. But only Hungary has a winner compensation system that throws proportionality to the winds. With winner compensation, the winners of individual constituencies may add difference between the number of votes they received and the number of vote received by the second-place candidate (minus one) to the totals for their party lists for use in calculating party-list mandates. It’s complicated but a simple explanation is here.

With the results in, we can see that winner compensation added six parliamentary mandates to the Fidesz totals, which were essential to the party’s supermajority. We calculated this using the Election Office website data that handily provides the difference in the number of votes between the first- and second-highest vote-getter each district here. The left alliance would gain three of those mandates, Jobbik would gain two and LMP would gain one.

The table below shows that, if winner compensation were removed from the system, Fidesz would lose six of its parliamentary seats, which by itself would put two-thirds far out of reach.

There was another trick cooked into the legal reforms that we can measure directly from the election results. Orbán’s new constitution gave expedited citizenship, upon application, to ethnic Hungarians who have never lived in Hungary. With citizenship came the right to vote. About 600,000 ethnic Hungarians “over the borders” took out citizenship and nearly 200,000 of them registered to vote. Voter turnout in this group was 81% (much higher than among domestic voters) but 19% of the ballots were disqualified due to errors in the way that the ballots were prepared. Six days after the election, these ballots were finally counted, and Fidesz won 95.49% of the “over the borders” vote.

The “over the borders” votes added 122,588 to the party list votes, enough for 1.4 parliamentary mandates. (Since all party list votes and compensation votes are added together before being divided by the total number of mandates available, all votes contribute to the overall pool and therefore particular sources like “over the borders” voters may produce fractions of mandates.) Given how close Orbán’s two-thirds majority was, the “over the borders” voters were clearly essential to achieving it. Every single mandate was necessary to the two-thirds.

Since Orbán’s supermajority hangs on the votes of the new “over the borders” citizens, the constitutional majority will depend on a set of voters whose ballots were most open to fraud. My earlier analysis showed that the votes from Hungarians “over the borders” were cast with virtually no integrity checks in place. The law required the Election Office to ignore irregularities in applications from this group alone, while ex-pats voting abroad were held to a higher standard. The list of the “over the borders” voters was secret so that only a few election observers could see it and, even then, these observers could record nothing from the lists. (This secrecy of the foreign voters’ list was justified, in the government’s view, because two of Hungary’s neighbors, Slovakia and Ukraine, do not permit dual citizenship.)

Fully one-third of the new citizens who registered to vote without a residence in Hungary gave no address to which the ballots could be sent, providing only an email address. As a result, we cannot even tell what country these voters are voting from and there are even fewer controls on the integrity of the process through which these voters got their ballots. Though secrecy of the process is a logical consequence of giving citizenship to ethnic Hungarians living in countries that ban dual citizenship, this secrecy also makes it very hard to check the integrity of the vote. New citizens who registered to vote abroad could have asked for their ballot to be sent anywhere. And of course, these Hungarians “over the borders” were the only ones allowed to vote either by mail or by having a proxy drop their ballot at a designated polling station without the voter herself having to appear in person.

The “over the borders” citizens faced no ID check in place anywhere in the process from the initial registration to vote to the actual casting of the ballot. As a result, there were no formal checks that would ensure whether people who registered to vote and voted were in fact the new citizens in whose name they voted. All other voters who cast ballots in the Hungarian election had to show some ID to vote. But not those over the borders.

The actual balloting did little to ensure confidence in the integrity of these votes. Photographs published in the online HvG news portal showed voters in Transylvania voting in tents helpfully provided by the Erdély Magyar Nemzeti Tanács. This is a group that has close links with Fidesz. As you can see if you look at the pictures, there was no secrecy of the ballot.

In addition to the voter assistance helpfully provided by Fidesz allies, tens of thousands of ballots (111,268 ballots in fact) were dropped off at consulates by unofficial bundlers who gathered up the votes from Hungarian communities and took them to polling stations without having to demonstrate that the ballots collected in this way arrived intact and unchanged. There is no public accounting of who these bundlers were. Establishing the integrity of the “chain of custody” from voter to polling station was not required.

While these new voters are only responsible for a little under one and a half mandates, they are now key contributors to Orbán’s razor-thin constitution-making majority. But these are votes under a shadow of suspicion.

Orbán’s mandate to be prime minister in the next government came from the voters. His supermajority came from a variety of legal tricks contained in the laws that were written by Fidesz, for Fidesz.

* * *

The day after the election, election monitors filed a hard-hitting assessment based on their observations in the month before the election. They said good things about the generally efficient administration of the actual balloting (without having looked closely yet at the “over the borders” votes) and they praised the diverse choice of candidates on offer. But the evaluation of the monitoring team was sharply critical about many other aspects of the election. Their report concentrated on the unfairness of the campaign, going beyond the unfair effects of the election rules that I have shown above.

As their report indicates, the “main governing party enjoyed an undue advantage” because, among other things, the campaign “did not fully respect the separation of party and state.” The election monitoring team confirmed this damning judgment in multiple ways.

The government had developed a slogan “Hungary is performing better” which the government had used since March 2013 to advertise its own accomplishments. Just before the campaign began, government then “sold” the slogan to Fidesz for EUR 640. But, while Fidesz took up the slogan, the government continued to use it in government advertisements on commercial television, where election ads from parties were banned. Eventually, the Supreme Court found that government ads using the same slogans as the governing party violated the campaign rules and had to be removed. But that decision did not come until 18 March, very close to the election, after the ads had run for weeks.

Fidesz-run municipalities also campaigned on behalf of the governing party, running campaign ads on municipally funded television, contributing to the lack of separation between party and state. In addition, a huge advertising campaign sponsored by the government-allied NGO Civil Unity Forum (CÖF) “circumvent[ed] campaign finance regulations,” as the monitors said. What the election monitors did not say is that the law itself exempted the government and the NGOs from the campaign finance limits specifically and from the campaign rules altogether, so the overwhelming blitz of pro-Fidesz information coming from the government and its allied NGOs was not regulated by law while the activities of parties were strictly controlled.

The election monitors noted that most of the campaign was devoted to negative press coverage of corruption allegations against the Socialist party. Early in the campaign, charges were brought against a deputy leader of the Socialists, who resigned when the allegations were made public. What the election monitors did not say is that the corruption allegations were brought at the start of the campaign by a public prosecutor who has long been allied with the governing party. The monitors did note that after the charges were brought, the government-allied media talked about almost nothing else during the rest of the campaign.

But the deputy leader was not the only allegedly corrupt Socialist to dominate the campaign. Huge posters all over Budapest sponsored by CÖF showed unflattering pictures of the three top candidates on the left alliance ticket, along with the Socialist former deputy mayor of Budapest. He was not running for anything but he had been awaiting trial on corruption charges for years. Though charged ages ago, his case is in legal limbo, having been moved around the legal system by political officials who changed the location of the trial. At the moment, no court acknowledges jurisdiction of his case. But his face was all over the city.

In neither corruption case was concrete evidence against these opposition politicians proven in court before the allegations were used in the campaign. As the government-allied media whipped up a frenzy about these corruption charges, support for the left alliance dropped in the last few weeks before the election. In the end, the election monitors reported, “The tone of the campaign was dominated by alleged corruption cases at the expense of discussion on substantive issues.”

The monitors found that “the absence of other political advertisements on nationwide commercial TV, combined with a significant amount of government advertisements, undermined the unimpeded and equal access of contestants to the media, contrary to [OSCE standards].” Overall, the campaign was judged to have taken place on “an uneven playing field.”

The election monitors found that government offices charged with supervising the election were too close to the government itself. Because of the way that its permanent members had been selected, the National Election Commission was, in their view, “a partisan commission.” While more than 900 complaints were raised before the Election Commission during the election campaign, many were rejected on purely formal grounds without considering their substantive merits. Decisions of the Election Commission were “adopted unanimously without debate, while issues of substance were rarely addressed.” And the decisions were “inconsistent.” The monitors’ report concluded: “The rejection of complaints on formal requirements often left complainants without effective consideration of their claims, which is at odds with [the standards that the OSCE applies].”

The courts, too, did not always carry out their election responsibilities properly. As the election monitors noted, any technical mistake in an applicant’s submission resulted in an immediate rejection of the complaint without the possibility of an appeal. (Though the election monitors didn’t mention it, this standard was actually built into the law.) Perhaps most damning, the election monitors found that “[s]ome cases decided by the courts contradicted legislation and led to legal uncertainty.”

In support of this judgment, the monitors obliquely referenced two decisions of the Constitutional Court, where a majority of the judges have now been appointed by the governing party. One decision found that a government decree banning the placement of election posters did not have anything to do with free speech, and the other found that no constitutional issues were raised when some voters were allowed to vote by mail while others were prevented from doing so.

The Supreme Court did somewhat better than the Constitutional Court in policing election standards, as the case involving the government advertisements on commercial television revealed. But, as the monitors noted, the Supreme Court sometimes said one thing while the Constitutional Court said another. The Supreme Court’s decision that campaign posters could be placed on lampposts contradicted the Constitutional Court judgment supporting the government’s ban. And, as the monitors’ report noted, the Supreme Court’s decision was “not fully enforced.”

The Media Council, with the remit to ensure balanced media coverage, failed to do so during the campaign, according to the monitors. Instead they found that the Council itself evinced “a lack of political balance” because all of its members were allied with the governing party. During the campaign, the Council enforced “unclear legal provisions” in way that created “uncertainty for media outlets.”

A content analysis of news coverage performed by the election monitors during the campaign found that the media themselves were systematically biased in favor of the governing party. Three of the five monitored television stations, for example, “displayed a significant bias toward Fidesz by covering nearly all of its campaign in a positive tone while more than half of the coverage of the opposition alliance was in a negative tone.” The public broadcaster showed a “lack of independence.” In the end, as the election monitors reported, “there are few independent media outlets” and “political pluralism is undermined by an increasing number of outlets directly or indirectly owned by businesspeople associated with Fidesz and by the allocation of state advertising to these media outlets.”

Journalists critical of the government reported to the election monitors that the withdrawal of state and private advertising from the opposition media “threatens the economic viability of media outlets and results in self-censorship.” Journalists also complained that the Media Council’s “significant sanctioning power create[s] fear of arbitrary inference.” The election observers backed the journalists, finding that “there is a lack of legal certainty due to a lack of clarity in what constitutes ‘balanced coverage’ in broadcast news,” a standard that the Media Council allegedly enforces.

The media during the campaign were also subjected to decisions from the Election Council and the Supreme Court affecting the content of broadcasting during the campaign. One decision made by the Election Commission and upheld by the Supreme Court required the lone opposition-friendly television channel to invite a Jobbik representative to a televised debate among opposition candidates.

The election monitors were concerned with other aspects of the new electoral system that created inequalities among voters. The dual system for foreign voters, in which new citizens who never lived in the country could easily register on line and vote by mail while expatriate Hungarians living abroad encountered a more onerous registration process and had to vote in person at consulates, “undermine[d] the principle of equal suffrage.” The election monitors also reported that this difference in treatment was “perceived as at attempt to differentiate voting rights on partisan grounds.” Among domestic voters, the new system for minority voting required advance registration and allowed voting for only one candidate which, in the view of the monitors, both undermined secrecy of the ballot and limited the electoral choices of minority voters.

Overall, the election monitoring mission documented violations of many international standards in the way the campaign was run, including a systemic failure to separate government from party, an overwhelmingly imbalanced media sphere, a partisan Election Commission along with a government-dominated Media Council and inconsistent courts, a campaign preoccupied with government-created scandals whipped up to a frenzy by government-controlled media, and serious inequalities in the right to vote for different categories of citizens.

Viktor Orbán needed every trick he used to get his two-thirds mandate. Every single parliamentary seat is crucial to it. Remove any one of the legal tricks above, or show that any of the campaign violations were consequential to the result, and the two-thirds is gone.

It is impossible to conclude, as the Hungarian government wishes the world to do, that Orbán was swept back into power with the eager support of two-thirds of Hungarian voters. Yes, Orbán’s Fidesz party won more votes than any other party. And yes, in most electoral systems in the world, that would allow this party to form a government. But Orbán’s two-thirds supermajority was obtained through a series of legal tricks. Moreover, the patent unfairness of the campaign itself cast serious doubts on the validity of the results in general.

Orbán’s constitutional majority – which will allow him to govern without constraint — was made possible only by a series of legal changes unbecoming a proper democracy. Not only were the legal changed rammed through the parliament by Orbán’s own party over the objections of the opposition, but all of these legal changes are now cooked into the new two-thirds mandate. Remove any one of them and the two-thirds crumbles. Add in any of the violations of international standards revealed during the campaign and the election results cannot even be trusted.

The European Union imagines itself as a club of democracies, but now must face the reality of a Potemkin democracy in its midst. The EU is now going into its own parliamentary elections, after which it will have to decide whether Hungary still qualifies to be a member of the club.

* * *

A note on numbers: These numbers look slightly different from the ones that the world’s press announced the day after the election, when Fidesz had 44% of the vote. The numbers I am using here were updated on 13 April, after the Election Office added several categories of new voters to the tallies, most on 12 April. Nearly a week after the election, the office officially added most of the votes from voters abroad – both those who did not permanent addresses in Hungary and those who did. The office also added in all of the voters who voted in Hungary, but in districts other than the ones in which they were officially registered. Plus the office added in the votes from one precinct per district, a precinct held back from the day-of-election vote counts in case the other last minute votes coming from ex-pats or voters voting outside the district constituted such a small number that secrecy of the ballot would be compromised by adding them late. This meant that about 170,000 domestic voters and 63,000 “over the borders” voters were added to the totals after election day. This analysis includes their votes.

Many thanks for assistance with the election analysis go to Miklós Bánkuti who received his MPA in 2012 from Princeton with a specialization in economics and Zoltán Réti who received his PhD in 1994 from the University of Florida in mathematics.

Krugman’s blog, 4/12/14

April 13, 2014

There was one post yesterday, “Wall Street, The City, And Austerity:”

Noah Smith, Simon Wren-Lewis, and I have in effect been having an intermittent, long-distance conversation about the role of the finance industry in promoting a view of our economic problems — one that emphasizes the dangers of deficits and monetary expansion — that has had a seriously damaging effect on policy. The question is why so many people in finance gravitate toward that view, and cling to it despite what is at this point overwhelming evidence that it’s wrong.

Wren-Lewis suggests that it was in large part about deflecting blame — that the financial industry was eager to shift attention away from its own role in creating crisis to the alleged role of fiscal profligacy. And I’m sure that was part of it. But I’d like to add a couple of other motives that seem, in my own experience, to have mattered.

One is the issue of stocks versus flows, which sounds obscure, but bear with me for a minute.

If you were listening to the deficit worriers from late 2009 right through until the summer of 2011, they were constantly asking “Who’s going to buy all those bonds we’re issuing?” And they kept arguing that while yes, someone was buying them now, those purchases will dry up any day now. In 2009 it was the argument that US Treasuries were being bought only through an unsustainable “carry trade”; in 2010-2011 it was only QE2 that was supporting bond prices; and so on.

Meanwhile, economists like me or Ben Bernanke were arguing that this was the wrong question: Asset prices mainly reflect the willingness of people to hold the stock of assets out there, not the flow of new assets being created, so that obsessing over who happened to be buying the flow today was wrong and created a false sense of fragility.

Events have largely confirmed the stock view. But why would finance people have leaned toward a flow view? One answer, I think, is that while demands for stocks are the big story, day-by-day movements in asset prices — movements that are usually just a fraction of a percent — do often reflect the order flow. And here’s the thing: while those day-to-day fluctuations aren’t important for economic policy, they’re all-important for traders trying to make money (which is why getting your trades in a millisecond before your rivals is a big business).

So finance guys were taking the kind of thing they worry about in their business, asset price movements driven by flows, and extrapolating it to macroeconomics, where it didn’t belong.

And this brings me to my second point: deficit scoldery, in addition to being in the class and industry interest of the scolds, was a way to assert the value of what they knew over the ideas of pointy-headed economists. Think about it: finance industry types know, or think they know, a fair bit about what goes on in markets — buyers and sellers, confidence, etc.. But here we were in a macroeconomic situation, the liquidity trap, which nobody in the West had seen for three generations.

And there were these guys with beards and cheap suits telling everyone that to understand what was going on you needed to know macroeconomic theory and a lot of musty old economic history. I suppose Wall Street and City guys could have decided to sit down and read textbooks and history books; yeah, right. It was much more natural for them to defend their turf, to declare that book learning was beside the point, that they knew markets and how markets worked and could tell you that those deficits were putting us in grave danger.

I don’t think that any of the reasons I’ve described are mutually exclusive. Ego, political interest, and personal interest all combined to encourage finance types to tell a story about the world that pushed governments toward austerity. And since nobody ever admits being wrong about anything, it just keeps happening.

Krugman’s blog, 4/11/14

April 12, 2014

There were four posts yesterday.  The first was “The Return of Expansionary Austerity:”

Here we go again. There’s now a full-court press of the usual suspects claiming that the recovery in the UK proves that fiscal austerity isn’t contractionary after all, that the IMF had it all wrong, and so on.

Jonathan Portes has an extended takedown; but the simple version is that the Cameron government did a lot of fiscal contraction in 2010 and 2011, but then slowed the pace of consolidation dramatically. Unfortunately, uncertainty over how big the UK’s output gap really is makes it hard to agree on a measure of fiscal policy, but just about every measure does indeed show austerity tapering off sharply after 2011. Here, for example, is real government non-interest spending:


European Commission

So the UK government did a lot of austerity, then stopped doing more, and the economy began to grow thereafter. Does this vindicate expansionary austerity? To use an analogy I’ve used before, if I keep hitting myself in the head with a baseball bat, and then I stop, I will start to feel better; this doesn’t mean that hitting yourself in the head with a baseball bat is a good thing.

If you read Portes’s piece, you’ll see that Osborne et al are engaging in some sophistry here, claiming that the government has never changed its plan, so it’s still on Plan A. That’s a very dubious claim, but in any case it’s irrelevant to the macroeconomic argument. The fact is that the UK has done much less fiscal consolidation since 2012 than it did in the previous two years — so the fact that the economy has perked up since then is actually a vindication of Keynesian claims, whatever the government’s intentions.

Needless to say, I don’t expect any of this to make dent in austerian views.

The second post today was “Offshore and Underground:”

I had lunch with Gabriel Zucman today, co-author of the startling new paper (pdf) showing that the concentration of wealth at the very top — the 0.1% — is fully back to Gilded Age levels.And he pointed me to another paper that flew under my, and I suspect other peoples’, radar: his demonstration that a lot of wealth at the top is held in offshore tax havens (pdf).

You might have suspected that already, but it’s one thing to rely on anecdotal evidence, another thing to find the clear footprint of underground money in official statistics. What Zucman points out is that we have international data on investment positions, with each country reporting its assets abroad and foreign-owned assets at home. But the numbers don’t add up: globally, liabilities are substantially larger than assets. That’s mathematically impossible, but Zucman shows that it’s what will appear in the statistics if a lot of money is run through offshore havens, so that the ownership doesn’t show up in anyone’s national statistics. And he uses other data and information to show that this is by far the most compelling explanation.

I think this is telling us something important about how the world really works. There was a flurry of interest in the offshore haven issue when Mitt Romney’s Cayman Islands accounts; a bit more interest when Cyprus hit the wall, and the question of what it was doing arose. But the issue keeps receding, I think due to a sense that it’s somehow trivial, a matter of a few Russians and maybe a handful of our own wealthy.

In reality, however, it’s almost surely a much bigger deal than that. At the commanding heights of the US economy, hiding a lot of one’s wealth offshore is probably the norm, not the exception.

The third post yesterday was “Health Reform and Affinity Fraud:”

Over at Talking Points Memo, they seem bemused by the violent reaction on the right to any suggestion that Obamacare is working as well as all the evidence suggests it is. Josh Marshall and Ezra Klein both made a fairly obvious point: Kathleen Sebelius’s resignation was almost surely timed to follow good news, so that her departure wouldn’t be easy to spin as part of a narrative about failed reform. The right, however, went ballistic — not so much expressing skepticism over the good enrollment numbers and the encouraging survey data as expressing total outrage and bewilderment that anyone believes the good news. On the right they know, just know, that it’s a total disaster.

What’s interesting about this is that conservative health wonks, however much they may like to spin facts, know better: even on the right, everyone who knows anything about the subject has been telling people not to expect a collapse, a death spiral, whatever, and even suggesting that Republicans may need to accept that much of Obamacare is irreversible. But not many people in that camp read, say, Avik Roy; they’re getting their information from Fox News and Rush, and they hear nothing but tales of disaster.

But why would they place so much faith in these sources? These are, after all, the same sources that told them that Romney was going to win big, that we were headed for hyperinflation, and much much more. How can such experiences not have instilled at least a bit of doubt?

Well, we basically know the answer. One thing I learned from reporting on the Madoff affair was the term “affinity fraud”: people are easily duped by con men who seem to be like them, to be their kind of people. What Fox, Rush etc. do is build a cultural and emotional bond with their audiences, based mainly on who they dislike and attack. And that bond induces those audiences to believe that what comes from these sources is the obvious truth, never mind what those arrogant elitists with their “facts” and “data” may be saying. (I’m turning into Stephen Colbert as we speak.)

Anyway, it’s quite a sight to behold.

The work week ended, as usual, with music.  His last post yesterday was “Friday Night Music: Carolina Chocolate Drops:”

Saw them last night at Brooklyn Academy of Music. Totally amazing. Every time you thought they couldn’t surprise you any more with their range, they pulled something else out — and not just by singing in Gaelic. When Rhiannon Giddens kicked off her shoes and starting dancing, the whole audience lost it.

 

Krugman’s blog, 4/10/14

April 11, 2014

There was one post yesterday, “Greenish Shootlets in Southern Europe (Implicitly Wonkish):”

 

There are hints of recovery in some of Europe’s austerity-stricken economies. Even Greece is finally showing some signs of an uptick. And you know one thing is going to happen: some people will say, “See — growth despite austerity! Krugman and the Keynesians were wrong!”

What’s interesting is that at the very same time other people (or in some cases, I think, the same people) are pointing to the lack of recovery in the United States and declaring “This has gone on so long that it can’t be cyclical. Krugman and the Keynesians are wrong!”

So whatever happens, I’m proved wrong. So it goes.

But what we should really be doing, of course, is asking what the models (not the person) predicts. And I want to enlarge on some points I made last fall.

Back then I pointed out that textbook macroeconomics says that economies will eventually self-correct from adverse demand shocks, including those created by fiscal austerity. And I do mean textbook: from the World’s Best Principles Book,

The idea is that high unemployment produces gradually falling wages and prices, and that the economy slides down the aggregate demand curve until full employment is restored in the long run. The problem is that this is the long run in which we are all dead — that is, the cost in output lose and lives ruined may be immense by the time you finally get there.

Beyond that, I noted that in a liquidity trap it’s hard to see why aggregate demand should slope down. The usual channel through which lower prices increase demand, via an increased real money supply and lower interest rates, doesn’t work; meanwhile a worsened burden of debt means that a falling price level probably reduces demand. So the aggregate demand curve slopes the “wrong” way, and the auto-correct mechanism doesn’t work:

The paradox of flexibility
The paradox of flexibility

But wait: this is an analysis for a closed economy, or more realistically, for an economy with a floating exchange rate. What if you’re Greece, with a fixed exchange rate (because you have no currency of your own) vis-a-vis a much larger currency area? IN that case falling wages and prices make you more competitive, so that the aggregate demand curve probably slopes down after all, for different reasons.

So we would expect deflation in Greece eventually to produce recovery, even in a totally Keynesian framework. The point, however, is that the cost of austerity and currency rigidity has been immense, and will continue to be immense for years even if GDP is finally growing again.

Krugman’s blog, 4/9/14

April 10, 2014

There were three posts yesterday.  The first was “Stagnation Without End, Amen (Wonkish):”

In 1938 Alvin Hansen, who did more than anyone else to bring Keynesian economics to America, gave a landmark speech to the American Economic Association. (The speech is behind a paywall, but Tim Taylor has a good summary here.) In it, he made the case for “secular stagnation” — a persistently depressed economy. His arguments were pretty good, too: slow population growth and slow technological progress, he argued meant low investment demand — and even very low interest rates wouldn’t be enough to make up for the shortfall.

Incidentally, for those who believe that the new interest in secular stagnation vindicates arguments like those of Greider, notice that technological progress in the secular stagnation story has the opposite sign; instead of worrying that rapid technological progress will destroy jobs, secstaggers (we are going to need a word!) worry that slow technological progress will mean not enough investment demand.

Of course, it didn’t happen at the time; but many people took the wrong conclusion from Hansen’s failed prediction. They took it to mean that secular stagnation could not happen in real life, that the magic of the marketplace would always find a way to restore full employment. But given what actually happened — a baby boom and a wave of productivity growth that Hansen failed to anticipate — his theory never got a real test.

Moreover, you could very much argue that Japan since the 1990s fits Hansen’s story quite well. Stagnating population? Check. Slowing technological progress? Well, not so clear cut, but certainly Japan didn’t progress after 1990 the way it did before. Persistently depressed economy? Oh yes.

And now we’re talking about the same thing for advanced western economies. And this time the theory is getting more explicit: Eggertsson and Mehrotra (pdf and very wonkish) have an excellent paper showing how this can happen.

There are two things I really like about the EM paper. First, it shows that I was wrong. Second, it shows that I was right.

On the wrongness side of the ledger: In my original Japan piece (pdf), I offered a little model of a liquidity trap in which, for simplicity, I assumed infinitely-lived agents. This was a gadget, not a fundamental assertion — that is, it was a way to push aside complexities I din’t think were central to the logic. The rest of the literature has followed the same path of least mathematical resistance.

As Eggertsson and Mehrotra point out, however, this approach effectively rules out anything like secular stagnation: the real interest rate eventually must equal the discount rate of whichever players matter on the margin. So a liquidity trap has to be a temporary phenomenon driven by a temporary shock. Since this fitted in with what policymakers wanted to hear, and with the general presumption that Hansen-type stories can’t be right, it went largely unquestioned.

But EM show that once you have overlapping generations, you can indeed have secular stagnation. So this is kind of an object lesson in how strategic simplifications in modeling — which are necessary! — can lead you to overlook important possibilities.

On the other hand, EM confirm my hypothesis of a timidity trap: while an inflation target, if believed, can bootstrap you out of secular stagnation, it has to be a sufficiently bold target. Announce your commitment to 2 percent inflation when the economy needs 4, and nothing happens.

I need to work a lot more on the mechanics of this paper; I’m wondering in particular whether there is a possibility of sustaining the economy with permanent fiscal expansion.

But important stuff.

Yesterday’s second post was “Low Inflation and Structural Illusions (Wonkish):”

The suggestion that only the short-term unemployed matter for wage determination, that the long-term unemployed have been written off, is rapidly congealing into orthodoxy. And it might be true. But I’m with Mike Konczal here: it’s far from being a well-established fact. Mike argues that to the extent it was true at all, it was a temporary phenomenon, and that more recent data don’t support the claim. I’d make a different (although not necessarily conflicting) argument: a lot of the supposed evidence comes from applying Phillips curves estimated over periods of moderate to high inflation, and there are good reasons to believe that such estimates misbehave at low inflation.

If you look at the figures Mike extracts from Krueger et al (pdf), they show “accelerationist” Phillips curves: unemployment determines not the rate of change of prices or wages, but the change in the rate of change. The idea is that recent inflation gets built into expectations and hence establishes a new baseline for each year’s short-run tradeoff.

But we know that there is strong evidence for downward nominal wage rigidity, which is binding for many workers at low inflation; we are constantly told that these days inflation expectations are “anchored”; and we know from historical experience with prolonged large output gaps (PLOGs) that countries very rarely go into actual deflation. All of this suggests that using a wage or price equation estimated over the 70s and early 80s could be very misleading if applied to today’s environment.

In fact, I’ve pointed out in the past that if you restrict yourself to Great Moderation-era data, what you seem to find is an old-fashioned, non-accelerationist Phillips curve. Furthermore, recent experience is consistent with that curve. Here’s the rate of growth of nonsupervisory wages:

I’d like to see someone do some more formal testing here, estimating Phillips curves on some rolling basis. My strong bet is that the coefficient on lagged inflation, which is forced to be 1 in the Krueger et al work, “wants” to be a lot less than 1 in recent decades.

My point is that we may well be mistaking the normal behavior of a low-inflation, depressed economy for a structural rise in the natural rate of unemployment.

PS: The Beveridge curve, widely taken as a sign of structural unemployment, seems to be normalizing.

The last post yesterday was “Capital in the Twenty-First Century:”

My NYRB review of Piketty is up.

Krugman’s blog, 4/8/14

April 9, 2014

There were two posts yesterday.  The first was “Three Legs Good, One Leg Bad:”

The good news for Obamacare just keeps coming in. Via Charles Gaba, the Rand Survey — which was the subject of a report in the LA Times, but which wasn’t publicly available — is now in. And it says that as of mid-March — that is, before the final enrollment surge — the Affordable Care Act had already produced a net gain of 9.3 million insured adults. Again, that’s a net gain; so much for claims that more people are losing insurance than gaining it.

At least some Republicans are realizing that (a) the ACA is not going to collapse and (b) they can’t simply take away insurance from millions of Americans. So they have to come up with an alternative.

And as Sahil Kapur reports, at least a few of them are coming to a terrible realization: there is no alternative. You can’t just support the popular pieces of reform, in particular coverage for preexisting conditions, and scrap the rest. As Jonathan Gruber taught me, and I and others have said many times, reform is a three-legged stool that requires community rating, the individual mandate, and subsidies; take away any leg and it collapses. And Kapur finds a GOP aide who admits to the awful truth: any workable GOP plan would look pretty much the same as Obamacare.

I don’t know how many GOP leaders, as opposed to aides, understand this. And even those who do won’t dare to admit it. The party line, literally, has been that Obamacare is an unworkable monstrosity, and the base will destroy anyone who points out, this late in the game, that it’s both workable and pretty much the only doable alternative to single-payer.

And if that’s not a case of politics making people stupid, I don’t know what is..

The second post yesterday was “ECO 348, The Great Recession: Quantitative Easing:”

Slides here (pdf).


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