Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 8/27/14

August 28, 2014

There were three posts yesterday.  The first was “The Way We Ate (Personal):”

The first time I had to cook for myself was the summer between my junior and senior years, when I was working for Bill Nordhaus on this paper (pdf); I shared a very beat-up apartment in New Haven, and tried, sort of, to do some of the cooking. To help, my mother bought me the Betty Crocker Good and Easy cookbook. And I have often told people about the, um, interesting recipes. But was my memory embellishing? Strangely, it never occurred to me to check it out on the intertubes. But I finally did — and no, I wasn’t making any of it up:

1 pound ring bologna
Cherry Pineapple Glaze (Below)
Potato Buds instant puffs (enough for 4 servings)

Cherry Pineapple Glaze
1/2 cup crushed pineapple
1/4 cup coarsely chopped maraschino cherries
1/4 cup light corn syrup
2 tabelspoons white vinegar
1/4 teaspoon cloves
2 drops red food color
1 1/2 teaspoons water
1 1/2 teaspoons cornstarch

Dear sweet Baby Jesus on a tricycle — it’s a wonder he’s still alive.  The second post yesterday was “Stockholm Syndrome in Paris:”

Sure enough, President Hollande has finally shown some steel — moving forcefully to suppress critics of his slavish adherence to the austerity demanded by Germany and Brussels.

The question I would ask is, what do Hollande and his inner circle think will make the situation turn around? Europe’s austerity drive has now gone on for four years; over the course of those four years the euro area has seen economic recovery shrivel, a much-touted comeback also stumble, and now a slide toward deflation. French economic performance tends to track the eurozone average; why should anyone expect France to come roaring back?

I’ll try to produce a more systematic analysis later today or tomorrow; but does anyone think that the Élysée Palace has a well-thought-out vision of how ever more austerity is going to produce a French renaissance? It’s just stumbling along day by day, waiting for something to turn up — when it’s much more likely that everything will turn down instead.

Yesterday’s last post was “What’s the Matter With France?:”

As I mentioned this morning, France’s President Hollande, after years of passivity, has finally taken strong action – firing anyone who questions his subservience to German and EC demands for ever more austerity. But what’s actually going on in the French economy? It is, of course, a catastrophe – hugely uncompetitive, failing to create jobs, etc. etc. – that’s what everyone says, so it must be true, right?

Actually looking at the data, however, reveals a number of surprises.

Let’s start with jobs. France has low labor force participation by the relatively old, thanks to generous retirement programs, and by the young, partly because generous aid means that few need to work while in school, partly perhaps because a high minimum wage and other factors discourage youth employment. What about prime-age workers? Figure 1 compares France and the United States. It’s a good thing we know that France is the country in crisis, isn’t it? Because otherwise you might get confused by employment performance that looks much better than ours.

Figure 1

Figure 1

Still, we know that France is highly uncompetitive on world markets. Figure 2 shows the French current account balance as a percentage of GDP, which is in, um, mild deficit, nothing like the deficits the United States ran during the “Bush boom”.

Figure 2

Figure 2

It’s interesting to note, by the way, that in the great European divide during the euro’s boom years, when costs in southern Europe surged relative to Germany, creating a huge problem of adjustment, France was – as you can see in Figure 3 – right in the middle, with no particular sign of getting out of line. This puts it in a somewhat awkward situation now that southern Europe is deflating while Germany refuses to inflate, causing an overall deflationary bias in Europe. But this isn’t a French problem so much as a euro problem.

Figure 3

Figure 3

Speaking of deflation, France – as you can see in Figure 4 — is well below the conventional 2 percent target (which is too low) and falling fast. Mr. Hollande may like to say that the French problem is supply-side, but it sure looks like demand-side by this criterion.

Figure 4

Figure 4

Still, France has to worry about bond vigilantes. After all, international investors are so worried about French prospects that they won’t lend to the country without being paid … well, the lowest rates in French history (Figure 5).

Figure 5

Figure 5

OK, you get the picture. French economic data look nothing at all like the story everyone tells. Yes, you can tell stories of excessive regulation, but they don’t dominate the macro picture. Yet Mr. Hollande is meekly going along with demands for ever more belt-tightening, reserving his wrath for those who want France to stand up for itself. And the result is a sort of multiplier process in which austerity causes growth to falter, which worsens the budget prospect, which leads to even more austerity.

What’s going on here politically? Simon Wren-Lewis makes a very good point. In America, many of the people who shape economic discourse are forever living in the 1970s, when stagflation was the order of the day; in France, the corresponding nightmare is the early Mitterand era, when France was suffering from Eurosclerosis and an attempt to pursue unilateral fiscal expansion (with a fixed exchange rate) failed. But now is not then. To an important extent, what ails France in 2014 is hypochondria, belief that it has illnesses it doesn’t – and this hypochondria is leading it to accept quack cures that are the real cause of its distress.

Krugman’s blog, 8/25/14

August 26, 2014

There were three posts yesterday.  The first was “Kingslayer Me:”

OK, this has to be the funniest headline I’ve seen for a while, on Business Insider: The French Government Has Collapsed, And It’s Partly Paul Krugman’s Fault. The French prime minister has tendered his resignation amid a dispute set off by the economy minister’s decision to go public with opposition to austerity orthodoxy, and since he cited me on the subject, Business Insider has made a funny.

The real story, of course, is the combination of the abject failure of austerity at a Europe-wide level, and the intransigence of the policy’s instigators:

The decision by French Prime Minister Manuel Valls to present his government’s resignation on Monday does not make any difference to Germany’s focus on economic policies that strive for growth, job-creation and fiscal consolidation, a German government spokesman said on Monday.

“We continue to work for stronger growth and employment and our government still believes there is no contradiction between consolidation and growth,” said deputy government spokesman Georg Streiter. “Nothing has changed with us.”

It’s hard to believe that more than four years have passed since I called out austerians for their belief in the Confidence Fairy; after all that time, and all the disastrous experiences (not to mention the collapse of whatever intellectual basis there was for the pro-austerity view), nothing has changed.

Yesterday’s second post was “Yellin, Wages, and Intellectual Honesty:”

Jared Bernstein is a bit puzzled by the piece of Janet Yellen’s talk at Jackson Hole in which she suggests that some of the weakness in wages may reflect delayed adjustment rather than unemployment. Since her message was basically that the Fed should keep its pedal to the metal for a while yet, why blur the message?

But I think I understand what Yellen was doing — and her willingness to do it underscores the asymmetry between the two sides in this debate.

Here’s how it works: If you believe that we’ve spent the past six years suffering from a huge overhang of excess supply, that inadequate demand is the whole story — as Yellen does, I do, and so should you — you do have one slightly awkward question to answer: while inflation has been subdued, why hasn’t it turned into deflation? If labor is in huge excess supply, why are average wages still rising, albeit slowly?

Doves like me have taken that question seriously, and placed a fair bit of weight on downward nominal wage rigidity. If wages don’t fall except in extreme cases, you can explain average wages continuing to rise by the combination of sticky wages for some workers and rising wages for those workers who, for whatever reason, face better-than-average prospects.

If that’s your story, however, it has other implications, including the one Yellen identified — a sort of delayed wage-depression effect that persists for a while even as markets recover. And Yellen felt compelled to mention that implication, I think basically because she wanted to make it clear that she was engaged in a good-faith analytical exercise, not trying to build a brief for the policy she wanted for visceral or political reasons.

What’s notable, then, is that you hardly ever see this kind of thing on the other side. Inflation hawks rarely lay out any specific model of how inflation is supposed to take off in a depressed economy; nor do they talk about testable implications of their view, or for that matter offer any explanation of why they’ve been so wrong for so long.

It is, in other words, an asymmetric debate from an intellectual point of view. Doves are doves because their analysis leads them to believe that rates should stay low, and they make a point of explaining that analysis, addressing its implications even if they don’t lend support to their policy case, and suggesting what information might lead them to change their mind. Inflation hawks know what they want, and don’t feel any need to explain clearly why or how they might be wrong.

If this reminds you of other debates these days, it should. It’s not just facts that have a liberal bias; so does careful, open-minded analysis.

The last post yesterday was “Real Americans and Real Economics:”

Maybe I’m deluding myself, but it seems to me that we’re not hearing as much as we used to about “real Americans” — the notion that the true essence of the nation is white people living in small towns, associated these days with Sarah Palin but also invoked by whatshisname, the guy who lived in the White House between Clinton and Obama and misled us into war. But I’m sure that’s still how a lot of people on the right see it.

What made me think about that concept is something sort of parallel I’ve noticed about the reaction to my writings. Often, I find, the most rage-filled emails and voice mails come after I’ve written something fairly economistic, like today’s piece. And typically, part of the rant is something along the lines of “You call yourself an economist?” You see, the person delivering the rant has a notion of what economics is; he (it’s almost always a he) believes that “real economics” is about singing the praises of free markets — basically Capitalism Roolz. It’s inconceivable to him that you could have a more nuanced view without being a Marxist. And he’s outraged both that I have the temerity to claim that I’m doing economics and that other people seem to take me seriously.

And it’s not just random Tea Partiers who think this way. It includes hosts of TV business shows, and some famous economists too.

What’s really odd about this view is that you could hardly imagine a time when the evidence was less supportive. We’re just coming off a dramatic economic collapse that had nothing to do with any obvious supply-side factors, but seemed obviously connected to malfunctioning markets. And in the aftermath of the collapse, the supposed real economists made a lot of predictions about runaway inflation, soaring interest rates, and so on that proved notably wrong, while the unreal types like me have done more or less OK.

In fact, there is remarkably little evidence that “real economics” is right even in normal times. The efficiency of competitive markets is a nice story, but where are the dramatically successful predictions we generally look for as confirmation of scientific theories? Indeed, the general presumption even within the economics profession that microeconomics is solid and known to be valid, while macroeconomics is flaky and dubious, seems to me to rest on prejudice rather than evidence. Yes, much of micro can be derived rigorously from individual maximization plus equilibrium; but why, exactly, does that make it right?

So, in my mind the real America is the diverse America we actually live in, and real economics is the eclectic mix of ideas and techniques that seem to be useful, whether or not they have rigorous microfoundations. And I say that as both a real American and a real economist.

Krugman’s blog, 8/23/14

August 24, 2014

There were three posts yesterday.  The first was “Another Night in Brooklyn:”

Will Butler of Arcade Fire and some guy wearing funny clothes

Will Butler of Arcade Fire and some guy wearing funny clothes

Arcade Fire at Barclays Center. I’ve been following their music more or less obsessively for years, but this was my first live concert. It’s quite an experience — watching the videos doesn’t give you anything like the feel for the sheer energy and joy, both of the band and the audience. I have to admit that the sound in a big arena is a bit murky — the bass was too loud — so it helped if you already knew and loved all the songs, which I did. Wake Up was a stunning climax, as always.

Really fantastic. Oh, and let’s hear it for the great city of New York, where the subways run all night, and a guy taking the 2 train at midnight in a monkey suit attracts no attention at all.

Yesterday’s second post was “Draghi at Deflation Gulch:”

Full disclosure: I know Mario Draghi, a bit, since we overlapped in grad school, and I both like and admire him; he did a fantastic job of containing the euro crisis of 2012. And I like to imagine that he knows and understands more than he can say in his position. Still, I don’t think I’m projecting too much in reading his Jackson Hole speech as the words of a man who knows perfectly well how dire the situation is, and is sailing as close to the wind as he can, but is all too aware of how inadequate that’s likely to be.

Although he gives a nod to structural factors, he effectively declared that people in Europe are exaggerating the problem:

Research by the European Commission suggests that estimates of the Non-Accelerating Wage Rate of Unemployment (NAWRU) in the current situation are likely to overstate the magnitude of unemployment linked to structural factors, notably in the countries most severely hit by the crisis

and he basically says that the problem with the euro is inadequate demand:

The most recent GDP data confirm that the recovery in the euro area remains uniformly weak, with subdued wage growth even in non-stressed countries suggesting lacklustre demand. In these circumstances, it seems likely that uncertainty over the strength of the recovery is weighing on business investment and slowing the rate at which workers are being rehired.

So he’s effectively saying the same thing as Janet Yellen: if unemployment is structural, where are the wage gains?

Also, the confidence fairy has vanished from official ECB rhetoric. So has the ECB’s trigger-happiness when it comes to any hint of inflation:

The risks of “doing too little” – i.e. that cyclical unemployment becomes structural – outweigh those of “doing too much” – that is, excessive upward wage and price pressures.

The trouble is, what can he do about it? He appeals for a consideration of euro-wide measures of fiscal stance, which is basically urging Germany to run bigger deficits, but the Germans aren’t interested. He says that the ECB will do more, but doesn’t promise massive QE, probably because he knows he can’t.

The point is that even if Draghi is, as I believe he is, a good man and a good economist who gets the situation, the combination of the euro’s structure and the intransigence of the austerians means that the situation remains very grim.

Yesterday’s last post was “Attack of the Crazy Centrists:”

I’m by no means the only person, or even pundit, who sometimes (often) feels that centrists are the craziest people in our political life. Liberals these days rarely stake out really extreme positions (more on that in a minute); conservatives may denounce Obama as a Muslim atheist communist, but at least they know what they want. The really strange people are those who insist that there is symmetry between left and right, that both are equally far out and equally at fault for polarization, and make up all kinds of strange stories to justify this claim.

Barack Obama is, of course, the biggest target of these delusions; it’s really amazing to see pundits accuse him of being chiefly to blame for Republican scorched-earth opposition — you see, he should have used his mystic powers of persuasion to bring them into the tent. But liberal commentators also get hit — usually via gross misrepresentations of what we said. And of course I get this most of all.

Today Jonathan Bernstein leads me to Andrew Gelman, who catches an assertion that I’m all wrong about the difference in conspiracy theorizing between left and right.

What I said was that conspiracy theories are supported by a lot of influential people on the right, but not on the left. They misrepresent this as a claim that most conspiracy theorists are on the right, and point to evidence that “motivated reasoning” is equally common on left and right as proof that I’m wrong.

This is doubly wrong. For one thing — Gelman doesn’t say this as clearly as I’d like — motivated reasoning isn’t the same thing as conspiracy theorizing. Believing that official inflation numbers understate true inflation, based not on understanding the data but on political leanings, is motivated reasoning. Believing that the BLS is deliberately understating inflation and unemployment as a political favor to the White House is a conspiracy theory.

And there’s a big difference even when it comes to conspiracy theorizing between having something believed by some, maybe even a lot, of people and having it stated by influential politicians and other members of the elite.

So how did my claim about elites and conspiracy theories — which I think is very defensible, even obvious — turn into a supposed claim that isn’t defensible, and can be dismissed as foolish? Well, you know the answer: centrists want to believe that liberals are just as bad as conservatives, so they see shrill partisanship even when it’s not really there.

It is, in short, a classic illustration of politically motivated reasoning.

Krugman’s blog, 8/22/14

August 23, 2014

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

In popular perception, the era since 2008 has been one of massive failure for economic analysis. The truth, as I’ve often tried to explain, is nearly the opposite — at least for those of us who didn’t forget Keynes, and took a more or less IS-LM-is model seriously. We’ve actually had a very good run, successfully predicting the quiescence of interest rates despite huge budget dheficits, the quiescence of inflation despite huge increases in the monetary base, and the adverse effects of harsh austerity policies.

A new post by Cecchetti and Schoenholtz on core inflation reminds me that this concept, too, has been a huge success.

Actually, I don’t think C&S get the argument for using some kind of core measure quite right, although their actual data analysis is fine. They simply assume that there is a problem of distinguishing between the signal and the noise, that for some reason there is an underlying trend that is imperfectly measured by the headline inflation rate. I prefer to think of it in terms of an underlying economic model, in which many but not all prices are temporarily sticky; as I explained some time ago, this implies that there is at any point in time a sort of “embedded” rate of inflation, and this — rather than short-term fluctuations — is what we’re trying to measure.

In any case, those of us who looked at core inflation came in for a lot of abuse during the “debasing the dollar” period of 2010-2011, when right-wingers were writing to Ben Bernanke to attack his policies and Paul Ryan was warning that rising commodity prices were the harbinger of runaway inflation. Assertions that fundamental inflation hadn’t gone up were met with ridicule and insults.

But sure enough, the commodity price effect on inflation was a blip, and went away. And the inflation hawks learned their lesson, and revised their models. Hahahaha — just kidding.

The second post yesterday was “Friday Not Music: Cats of the Great War:”

Not feeling inspired today — maybe because I’m focused on tonight’s concert. So how about cats instead — it turns out that a lot of them actually did serve in World War I.

Great!  Moar kittehs, please, Prof.

Krugman’s blog, 8/21/14

August 22, 2014

There were two posts yesterday.  The first was “Hawks Crying Wolf:”

Binyamin Appelbaum:

An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly from its stimulus campaign, arguing that the bank has largely exhausted its ability to improve economic conditions.

Is this really true? Of course, they are being very vocal — but when didn’t they call for monetary tightening?

The article highlights Charles Plosser of the Philadephia Fed; if you’ve been following these things, you know that Plosser has been warning about imminent inflation since the beginning of the crisis. He did it in 2008; he did it in 2009; he did it in 2010; he did it in 2011; I’m getting tired here, but you can easily find him doing the same in 2012 and 2013. And he has of course been wrong all the way — but he’s doing it again. This is news?

The real story here is the remarkable resilience of inflation panic: people who worry about inflation never seem daunted in the least by the repeated failure of their predictions. It’s an interesting question why.

Yesterday’s second post was “The Euro Catastrophe:”

Matt O’Brien points out that Europe really is doing worse than it did in the Great Depression. Meanwhile, Francois Hollande — whose spinelessness and willingness to buy into austerity doomed his presidency and quite possibly the European project — is finally, tentatively, suggesting that maybe further austerity isn’t the answer.

Simon Wren-Lewis thinks that the European embrace of austerity was a historical contingency; basically, the Greek crisis strengthened the hand of the austerians at a critical moment. I don’t think it’s that easy to explain; my sense was that there was powerful anti-Keynesian sentiment in Europe even before the Greek crisis, that macroeconomics as Anglo-Saxon economists understand it never had a real constituency in Europe’s corridors of power.

Whatever the explanation, we are now, as O’Brien says, looking at one of the great catastrophes of economic history.

Krugman’s blog, 8/20/14

August 21, 2014

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

Via the FT, a new study compares perceptions of inequality across advanced nations. The big takeaway here is that Americans are more likely than Europeans to believe that they live in a middle-class society, even though income is really much less equally distributed here than in Europe. I’ve truncated the table to show the comparison between the U.S. and France: the French think they live in a hierarchical pyramid when they are in reality mostly middle-class, Americans are the opposite.

As the paper says, other evidence also says that Americans vastly underestimate inequality in their own society – and when asked to choose an ideal wealth distribution, say that they like Sweden.

Why the difference? American exceptionalism when it comes to income distribution – our unique suspicion of and hostility to social insurance and anti-poverty programs – is, I and many others would argue, very much tied to our racial history. This does not, however, explain in any direct way why we should misperceive real inequality: people could oppose aid to Those People while understanding how rich the rich are. There may, however, be an indirect effect, because the racial divide empowers right-wing groups of all kinds, which in turn issue a lot of propaganda dismissing and minimizing inequality.

Interesting stuff.

Yesterday’s second post was “Ancient Atlases:”

Several commenters on my Roman Empire post mentioned the Colin McEvedy historical atlas of the ancient world. Indeed, a great favorite of mine. And it fed right into my Asimov-psychohistory obsession with its declaration, early on, that

History being a branch of the biological sciences its ultimate expression must be mathematical.

One thing, though: there’s a clarity and sweep to the ancient history atlas that isn’t matched by the later atlases — and I suspect that ignorance is the main reason. That is, we tend to impose more order and simplicity on the distant past, not because it was actually any less messy and complicated than later eras, but because we don’t have all the details and fill in with bold colors and straight lines. As I’ve noted in the past, this is why goldbugs and others who believe that they have access to truths ignored by modern economists tend to draw on supposed events in the distant past, where they can project what they think should have happened onto a mostly blank slate.

So I love my ancient history, but I do think it’s important to realize that the world has always been characterized by buzzing complexity in which causes and effects can be hard to disentangle. Same as it ever was.

Krugman’s blog, 8/19/14

August 20, 2014

There were two posts yesterday.  The first was “Beyond the Lies:”

Greg Sargent notes that the midterm election, which was supposed to be a referendum on Obamacare, isn’t looking at all like that in practice; Republican ads denouncing health reform have been dwindling month by month.

The reason is fairly obvious, although it’s not considered nice to state it bluntly: the attack on Obamacare depended almost entirely on lies, and those lies are becoming unsustainable now that the law is actually working. No, there aren’t any death panels; no, huge numbers of Americans aren’t losing coverage or finding their health costs soaring; no, jobs aren’t being killed in vast numbers. A few relatively affluent, healthy people are paying more for coverage; a few high-income taxpayers are paying more in taxes; a much larger number of Americans are getting coverage that was previously unavailable and/or unaffordable; and most people are seeing no difference at all, except that they no longer have to fear what happens if they lose their current coverage.

In other words, reform is working more or less the way it was supposed to (except for the Medicaid expansion in non-cooperating states).

Many of us argued all along that the right’s chance to kill reform would vanish once the program was actually in place; the horror stories only worked as long as the truth wasn’t visible. And that’s what seems to be happening.

Yesterday’s second post was “Veni Vidi Wiki:”

Vox has a great explanation of the Roman Empire in 40 maps (not all of them maps, really, but close enough); I love this sort of stuff.

A small niggle: nobody now thinks that quinqueremes had five banks of oars, which would be unwieldy to say the least; even rowing a trireme is really hard. Probably there were only one or two banks, with multiple rowers per oar.

Anyway, great stuff; I really liked map 2, which gave me a much better appreciation for how big the empire was. While I’m at it, let me put in a plug for Peter Temin’s lovely book on the Roman economy. Much more fun than thinking about European stagnation.

Krugman’s blog, 8/16/14

August 17, 2014

There was one post yesterday, “Steps and the City (Fairly Trivial):”

Emily Badger tells us that sprawl is bad for your health; so are movie theater concession counters, reports Sarah Kliff, which is why Tom Harkin and Rosa DeLauro want to include popcorn under the rules requiring calorie disclosure. (At the risk of sounding whiny, they aren’t exactly “coming after” your popcorn; you’d be free to buy it, it’s just that the cinema would have to tell you how many calories you’re about to consume.)

In other words, neoclassical economics is all wrong.

OK, an overstatement. But both concerns about the health effects of urban layout and attempts to deter certain kinds of consumption are basically about the failings of rationality as a model of human behavior. People should get enough exercise — they will, in general, be happier if they do — but they tend not to get exercise if they live in an environment where it’s easy to drive everywhere and not as easy to walk. People should limit their caloric intake — again, they’ll be happier if they do — but have a hard time resisting those giant tubs of popcorn.

I can personally attest to the importance of these environmental effects. These days, I walk around with a pedometer on my wrist — hey, I’m 61, and it’s now or never — and it’s obvious just how much more natural it is to get exercise when I’m in New York than when I’m in Princeton; just a few choices to walk rather than take the subway fairly easily gets me to 15,000 steps in the city, while even with a morning run it can be hard to break 10,000 in the suburbs. Also, the Bloomberg nanny-state legacy, with calories displayed on practically everything, does help curb my vices (greasy breakfast sandwiches!).

The interesting and difficult question is how, and whether, these kinds of behavioral issues should be reflected in policy. There are some conventional externality arguments for promoting walkable development — less pollution, etc.. But can we, should we, also favor walkability and density because it promotes good habits? How far should regulation of fast food go? Etc., etc.

Also, isn’t it kind of interesting that these days big-city residents on average lead more “natural” lives, being outside and getting around on their own two feet, than “real Americans” who live in small cities and towns?

Now, time to finish my Mark Bittman-approved unsweetened oatmeal and not, repeat not, get a breakfast sandwich.

He’s absolutely right.  In the area where I live it’s almost impossible to even take a walk safely since on most streets there are no sidewalks so you have to walk in the road.  And down here they drive STOOPID.

Krugman’s blog, 8/15/14

August 16, 2014

There were three posts yesterday.  The first was “Secular Stagnation: The Book:”

Ebook, actually: the invaluable VoxEU has a new ebook with contributions from a lot of good people — and also one from me — which is must-reading for anyone trying to keep up with current debates about our economic prospects.

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.

Anyway, go thou and download. You need to read this.

Yesterday second post was “All About Zero:”

The VoxEU servers were briefly overwhelmed by hits after I linked to their new ebook on secular stagnation, but you should be able to download it now. And I guess I should say a few more words about why it matters so much.

Way back in 2008 I (and many others) argued that the financial crisis had pushed us into a liquidity trap, comparable to the situation Japan has faced since the mid-1990s — a situation in which the Fed and its counterparts elsewhere couldn’t restore full employment even by reducing short-term interest rates all the way to zero. We can argue about what else central banks can do by way of buying longer term and/or risky assets, trying to change expectations, and so on, but in practice the zero lower bound has huge adverse effects on policy effectiveness. It also drastically changes the rules as long as it’s binding; as I said very early in the crisis, virtue becomes vice and prudence is folly. We want less saving, higher expected inflation, and more.

And let me simply point out that liquidity-trap analysis has been overwhelmingly successful in its predictions: massive deficits didn’t drive up interest rates, enormous increases in the monetary base didn’t cause inflation, and fiscal austerity was associated with large declines in output and employment.

What secular stagnation adds to the mix is the strong possibility that this Alice-through-the-looking-glass world is the new normal, or at least is going to be the way the world looks a lot of the time. As I say in my own contribution to the VoxEU book, this raises problems even for advocates of unconventional policies, who all too often predicate their ideas on the notion that normality will return in the not-too-distant future. It raises even bigger problems with people and institutions that are eager to “normalize” fiscal and monetary policy, slashing deficits and raising rates; normalizing policy in a world where normal isn’t what it used to be is a recipe for disaster.

Do we know that secular stagnation is here? No. But the case is strong enough that it should color almost every policy discussion.

The last post on Friday, as usual, was musical.  Here’s “Friday Night Music: Lucius Does Buddy Holly:”

I love live concerts, and see Lucius whenever I get a chance. But let us also praise the internet for making moments like this — a few fine musicians who love what they do, doing their thing in a tiny space somewhere backstage — available to the rest of us.

It’s nice, but I still prefer the original (which I remember vividly since I’m an old fart).

Krugman’s blog, 8/13/14

August 14, 2014

There were three posts yesterday.  The first was “What’s the Matter With Europe?:”

Just a few months ago Europe’s austerians were busy congratulating themselves, declaring that a modest upturn in southern Europe vindicated all their actions. But now the news is looking grim, with industrial production stalling out and good reason to fear yet another slide into recession:

 

This comes as many though not all US data points are suggesting stronger growth. So why has Europe done so badly? I’m actually not too committed to any one story here; there are arguably several factors.

First, there is fiscal austerity, which has been a very big drag. It’s important to realize, however, that the US has also had quite a lot of de facto austerity via the sequester and all that at the federal level, and state and local cutbacks. If we use the IMF’s measure of structural balances, Europe has indeed tightened relative to the United States:

International Monetary Fund

But it’s not as big a difference as you might think — maybe 2 1/2 points of potential GDP.

You can also argue that Europe’s fundamentals are considerably worse. If you’re worried that secular stagnation might be depressing the natural real rate of interest — the rate consistent with full employment — and you think that demography is a big factor, Europe looks really terrible, indeed full-on Japanese:

 

This says that Europe really, really needs to keep inflation expectations from sliding — in fact, it almost surely needs expected inflation higher than 2 percent. In fact, however, the ECB has been much less successful than the Fed at keeping expected inflation from declining.

And this reflects past policy choices and what they say about institutional biases. In the US, Janet Yellen and associates have been quite clear that they are prepared to take some inflation risks on the upside in order to avoid the “nightmare scenario” of raising rates only to discover that the economy was weakening again, and thereby deepening the liquidity trap. In Europe, however, the nightmare scenario isn’t hypothetical: it happened both in 2008 and, incredibly, again in 2011. And the sadomonetarists at the BIS and elsewhere continue to have much more influence in Europe than in the United States.

The thing is, I don’t believe that current management at the ECB is that different in its understanding of what policy should be doing from leadership at the Fed. But it has to struggle against an economy that is weaker in its underlying fundamentals, bad history, and a much more powerful contingent of monetary hawks.

It really is quite scary.

Yesterday’s second post was “Good For Margaret Sullivan:”

The Times’s public editor weighs in on the sliming of Rick Perlstein, and concludes:

So I’m with the critics. The Times article amplified a damaging accusation of plagiarism without establishing its validity and doing so in a way that is transparent to the reader. The standard has to be higher.

 The third post yesterday was “Fiscal Flimflam, Revisited:”

Brad DeLong reminds us of the original Ryan budget plan — or actually “plan”, as I’ll explain — and emphasizes its dire warnings about a looming debt crisis that wasn’t. But pointing out that the debt panic was unjustified only gets at part of what was wrong with that Ryan budget (and all his subsequent proposals). For the fact is that it wasn’t a proposal made in good faith.

As I and others pointed out at the time, when you looked at the substance of what Ryan was proposing, it didn’t at all match up to his supposed deep concern over the deficit. Specifically, in the first decade he proposed savage cuts in aid to the poor, but he also proposed huge tax cuts for the rich — and the tax cuts for the rich were bigger than the aid cuts for the poor, so that the specifics of the plan were actually deficit-increasing, not deficit-reducing.

So how did he claim otherwise? By declaring that he would make his tax cuts deficit-neutral by closing loopholes — but he refused to say anything about which loopholes he would close; and by claiming that he would make huge cuts in discretionary spending, again without specifying what he would cut. So the budget was essentially a con job.

Now, when I say things like that, people start howling about lack of civility. But I wasn’t insulting someone for the sake of insult; if you didn’t understand the essential dishonesty of the plan, you weren’t getting the story right. Yes, I could have used diffident language — but why? Readers deserve to be told clearly what is going on.

Look, I wish we lived in a world in which you could reasonably assume that people with different political views were arguing their case honestly. But we don’t. And you have to argue with the politicians we have, not the politicians we wished we had.


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