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Krugman’s blog, 4/6/14 part the first

April 6, 2014

He didn’t post to his blog yesterday, but he’s already put up a post this morning.  In case you’re following his course, here you go.  It’s “Eco 348, The Great Recession: Inflation or Deflation?”:

Slides here (pdf).

This controversy is one for the the textbooks, in a couple of ways. First, the complete starkness of the division, with some of us dismissing inflation worries and warning that deflation might happen, while others warned about “debasement” and runaway inflation; second, the almost complete unwillingness of one side of the debate to revise views at all despite being wrong for five years in succession.

Krugman, solo

March 24, 2014

In “Wealth Over Work” Prof. Krugman considers how we are making America safe for oligarchy.  Here he is:

It seems safe to say that “Capital in the Twenty-First Century,” the magnum opus of the French economist Thomas Piketty, will be the most important economics book of the year — and maybe of the decade. Mr. Piketty, arguably the world’s leading expert on income and wealth inequality, does more than document the growing concentration of income in the hands of a small economic elite. He also makes a powerful case that we’re on the way back to “patrimonial capitalism,” in which the commanding heights of the economy are dominated not just by wealth, but also by inherited wealth, in which birth matters more than effort and talent.

To be sure, Mr. Piketty concedes that we aren’t there yet. So far, the rise of America’s 1 percent has mainly been driven by executive salaries and bonuses rather than income from investments, let alone inherited wealth. But six of the 10 wealthiest Americans are already heirs rather than self-made entrepreneurs, and the children of today’s economic elite start from a position of immense privilege. As Mr. Piketty notes, “the risk of a drift toward oligarchy is real and gives little reason for optimism.”

Indeed. And if you want to feel even less optimistic, consider what many U.S. politicians are up to. America’s nascent oligarchy may not yet be fully formed — but one of our two main political parties already seems committed to defending the oligarchy’s interests.

Despite the frantic efforts of some Republicans to pretend otherwise, most people realize that today’s G.O.P. favors the interests of the rich over those of ordinary families. I suspect, however, that fewer people realize the extent to which the party favors returns on wealth over wages and salaries. And the dominance of income from capital, which can be inherited, over wages — the dominance of wealth over work — is what patrimonial capitalism is all about.

To see what I’m talking about, start with actual policies and policy proposals. It’s generally understood that George W. Bush did all he could to cut taxes on the very affluent, that the middle-class cuts he included were essentially political loss leaders. It’s less well understood that the biggest breaks went not to people paid high salaries but to coupon-clippers and heirs to large estates. True, the top tax bracket on earned income fell from 39.6 to 35 percent. But the top rate on dividends fell from 39.6 percent (because they were taxed as ordinary income) to 15 percent — and the estate tax was completely eliminated.

Some of these cuts were reversed under President Obama, but the point is that the great tax-cut push of the Bush years was mainly about reducing taxes on unearned income. And when Republicans retook one house of Congress, they promptly came up with a plan — Representative Paul Ryan’s “road map” — calling for the elimination of taxes on interest, dividends, capital gains and estates. Under this plan, someone living solely off inherited wealth would have owed no federal taxes at all.

This tilt of policy toward the interests of wealth has been mirrored by a tilt in rhetoric; Republicans often seem so intent on exalting “job creators” that they forget to mention American workers. In 2012 Representative Eric Cantor, the House majority leader, famously commemorated Labor Day with a Twitter post honoring business owners. More recently, Mr. Cantor reportedly reminded colleagues at a G.O.P. retreat that most Americans work for other people, which is at least one reason attempts to make a big issue out of Mr. Obama’s supposed denigration of businesspeople fell flat. (Another reason was that Mr. Obama did no such thing.)

In fact, not only don’t most Americans own businesses, but business income, and income from capital in general, is increasingly concentrated in the hands of a few people. In 1979 the top 1 percent of households accounted for 17 percent of business income; by 2007 the same group was getting 43 percent of business income, and 75 percent of capital gains. Yet this small elite gets all of the G.O.P.’s love, and most of its policy attention.

Why is this happening? Well, bear in mind that both Koch brothers are numbered among the 10 wealthiest Americans, and so are four Walmart heirs. Great wealth buys great political influence — and not just through campaign contributions. Many conservatives live inside an intellectual bubble of think tanks and captive media that is ultimately financed by a handful of megadonors. Not surprisingly, those inside the bubble tend to assume, instinctively, that what is good for oligarchs is good for America.

As I’ve already suggested, the results can sometimes seem comical. The important point to remember, however, is that the people inside the bubble have a lot of power, which they wield on behalf of their patrons. And the drift toward oligarchy continues.

Blow, solo

March 22, 2014

Nocera is on book leave, and apparently Ms. Collins will show up tomorrow.  In “Paul Ryan, Culture and Poverty” Mr. Blow says whatever the congressman meant by men “in inner cities,” there is danger where cover is given for corrosive ideas.  Mr. Blow, I think we all know what he meant.  That wasn’t a dog whistle, it was a train whistle.  And hoo boy, are TPTB in the media working to rehabilitate ZEGS…  “Liam Jumper” from South Carolina had this to say in the comments:  “My son’s university economics courses touched on urban and rural economics. When I told him Ryan’s remarks, his immediate response was, ‘I’ll bet he didn’t say anything about all the rural people in poverty. They’re mostly white and that would insult his Republican voters.’ ”  Here’s Mr. Blow:

Paul Ryan continues to be flogged for disturbing comments he made last week about men “in our inner cities” and their “culture” of not working.

In a radio interview with Bill Bennett, Ryan said, “We have got this tailspin of culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working or learning the value and the culture of work, and so there is a real culture problem here that has to be dealt with.”

Reactions to the comment were swift and brutal.

Representative Barbara Lee, a California Democrat, said in a statement, “Let’s be clear, when Mr. Ryan says ‘inner city,’ when he says, ‘culture,’ these are simply code words for what he really means: ‘black.’ ”

Ryan has agreed to meet with the Congressional Black Caucus, of which Lee’s a member and which found his remarks “highly offensive.”

But at a town hall meeting on Wednesday, Ryan was rebuked by one of his own constituents, a black man from Mount Pleasant, Wis., named Alfonso Gardner.

Gardner told Ryan, “The bottom line is this: Your statement was not true.” He continued, “That’s a code word for ‘black.’ ”

But instead of cushioning his comments, Ryan shot back, “There was nothing whatsoever about race in my comments at all — it had nothing to do with race.”

That would have been more believable if Ryan hadn’t prefaced his original comments by citing Charles Murray, who has essentially argued that blacks are genetically inferior to whites and whom the Southern Poverty Law Center labels a “white nationalist.” (The center’s definition: “White nationalist groups espouse white supremacist or white separatist ideologies, often focusing on the alleged inferiority of nonwhites.”)

Whatever Ryan meant by men “in our inner cities” and their culture, the comment obscures the vast dimension of poverty in America and seeks an easy scapegoat for it.

According to the Institute for Research on Poverty at the University of Wisconsin-Madison (in Ryan’s home state), the gap between the poverty rate in inner cities and that in rural areas and small towns is not as great as one might suspect. The inner city poverty rate is 19.7 percent, and the poverty rate in rural areas and small towns is 16.5 percent.

Furthermore, as Mark R. Rank, a professor of social welfare at Washington University, argued several months ago in The New York Times:

“Few topics in American society have more myths and stereotypes surrounding them than poverty, misconceptions that distort both our politics and our domestic policy making. They include the notion that poverty affects a relatively small number of Americans, that the poor are impoverished for years at a time, that most of those in poverty live in inner cities, that too much welfare assistance is provided and that poverty is ultimately a result of not working hard enough. Although pervasive, each assumption is flat-out wrong.”

His research, he noted, indicates that “40 percent of Americans between the ages of 25 and 60 will experience at least one year below the official poverty line during that period” and “54 percent will spend a year in poverty or near poverty.” Rank concluded, “Put simply, poverty is a mainstream event experienced by a majority of Americans.”

By suggesting that laziness is more concentrated among the poor, inner city or not, we shift our moral obligation to deal forthrightly with poverty. When we insinuate that poverty is the outgrowth of stunted culture, that it is almost always invited and never inflicted, we avert the gaze from the structural features that help maintain and perpetuate poverty — discrimination, mass incarceration, low wages, educational inequities — while simultaneously degrading and dehumanizing those who find themselves trapped by it.

Other parts of Ryan’s original interview were on target, when he talked about the value and dignity of work and the way that work builds character. Work doesn’t always alleviate poverty, in part because some people are forced to work for less than a living wage, though work does bring dignity.

But this is in part the problem, and danger, of people like Ryan: There is an ever-swirling mix of inspiration and insult, where the borders between the factual and the fudged are intentionally blurred and cover is given for corrosive ideas.

Ryan is “one of the good guys,” a prominent Republican operative explained to me last week. Maybe so, but even good people are capable of saying and believing bad things, and what Ryan said was horrific.

Krugman’s blog, 2/19/14

February 20, 2014

There were two posts yesterday.  The first was “Loaves, Fishes, Hot Dogs and Buns:”

Matthew Yglesias tries to explain why productivity growth has nothing to do with deflation using a parable of loaves and fishes. I did something kind of similar long ago, arguing against a naive view of technological unemployment in terms of hot dogs and buns.

But wait — haven’t I been talking lately about both the possibility of technological change leading to a falling labor share and secular stagnation, with persistent shortfalls in demand? Doesn’t this amount to a repudiation of that old essay?

No, it doesn’t. The labor share issue is about the bias of technology, not the rate of progress. And secular stagnation is actually more likely if technological progress is slow, so that there is less reason to add capacity.

As a practical matter, I don’t get too worked up about this kind of misunderstanding anymore; it doesn’t have political power behind it, the way right-wing fallacies do. But it needs to be knocked down gently every once in a while.

Yesterday’s second post was “Letting Lehman Fail:”

One of the really good things about teaching a new course is that the work you put into developing your lectures often leads you to stuff you didn’t know about, missed, or had forgotten. Today’s class was a sort of narrative walkthrough of the financial crisis, and in the course of preparing I found myself trying to recall who actually thought letting Lehman fail was a good idea.

The answer is, a lot of people — and there were a fair number of op-eds and editorials congratulating Hank Paulson the next day, before it had become clear that the whole financial system was freezing up. Two notable examples:

Vince Reinhart:

The resources of the U.S. government are vast, but not unlimited. Thus far this year, officials have put federal funds at risk to facilitate the takeover of an investment bank, Bear Stearns, and to provide unconditional support to two government-sponsored enterprises, Fannie Mae and Freddie Mac.

At some point, the government had to say enough. That point came this weekend.

Those judgments can be second-guessed. But one thing is clear: Lehman did not cast a long enough shadow over markets to warrant support. And Treasury Secretary Henry Paulson and his colleagues are to be congratulated for the courage to make that determination.

Ken Rogoff:

No More Creampuffs
The Government Is Willing to Let Wall Street Firms Fail. That’s Good.

This past weekend, the U.S. Treasury and the Federal Reserve finally made it abundantly clear that they won’t bail out every significant financial firm in America. Certainly this came as a rude shock to many financiers. In allowing the nation’s fourth-largest investment bank, Lehman Brothers, to file for bankruptcy, and by forcefully indicating that they are prepared to see even more bankruptcies, our financial regulators showed Wall Street that they are not such creampuffs after all.

By allowing firms that took excessive risks to fail, regulators also reduce the political pressure to overregulate the system in the aftermath of the crisis. Let’s hope they hang tough for at least a little while longer.

Interesting.

 

Krugman’s blog, 2/13/14

February 14, 2014

There were three posts yesterday.  The first was “Vox Anti-Populi:”

Right now the online current-policy economics journal VoxEU — edited by my old student Richard Baldwin — has two fantastic pieces on inequality.

First up, Andrew Oswald and Nattavudh Powdthavee test the effect of wealth on political attitudes by looking at people who got richer, not through their efforts or inheritance, but by winning the lottery. Sure enough, lottery winners become more right-wing. Maybe that’s not surprising, but in case you had any doubts about whether to be a cynic, this should dispel them.

Even more interesting is the effect on political attitudes: lottery winners also became more likely to praise the current, unequal distribution of income:

(This is just the top line of the table; a number of other variables are included as controls).

Think about that for a minute. You might imagine that a self-made man, reasoning from his own experience, might come to the conclusion that people get what they deserve. But here are people who demonstrably, by design, got rich(er) through pure chance, having nothing to do with their talents or efforts. Yet their increased wealth nonetheless convinces them that society is fair. Presumably a big enough lottery win would turn them into Tom Perkins.

In the second piece, Davide Furceri and Prakash Loungani use an event-study framework — looking at what happens on average after clear changes in policy — to assess the effects of “neoliberal” policy changes (although they don’t put it that way) on inequality. Sure enough, they find that both fiscal austerity and liberalization of international capital movements are followed by noticeable rises in income inequality.

So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that “sound” economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant.

Yesterday’s second post was “The 2,000 Year Apartment:”

Bloomberg reports on the soaring prices of trophy apartments in Manhattan. The biggest sale so far was former Citigroup head Sandy Weill’s apartment, which he sold for $88 milion to the daughter of a Russian oligarch. But $100 million listings are out there.

For a bit of perspective: the median full-time worker in the United States makes about $40,000 a year. So it would take the typical worker 2,000 years to earn enough to buy the Weill apartment.

Still, people like Weill are exemplars of the free market at work. They work in an industry that delivers clear value to the economy, and has never relied on government bailouts. Oh, wait.

The last post yesterday was “Faking It:”

Three somehow related stories of the day:

1. Brent Bozell’s Media Research Center is an important part of the machinery that has, for the most part, successfully intimidated the news media into adopting a right-wing slant. (I’ve faced mass mailings, concerted attacks on my university email, and so on.) But Jim Romenesko finds something interesting: Bozell doesn’t write his own columns or books, forcing a staffer to do it.

2. The Koch brothers have been running ads in Louisiana with distressed citizens facing ruination from Obamacare. But the people in the ads are all paid actors.

3. Best of all is the news from The Can Kicks Back, which is a Bowles-Simpson-run outfit that was supposed to be the youth arm of Fix the Debt. It has always been an astroturf operation, and a clumsy one at that, doing things like hiring dancers to stage fake flash mobs and placing identical ghostwritten articles in college newspapers. Now, The Can Kicks Back’s campaign against debt is running into trouble, because it’s, um, running out of money.

What these stories have in common is that they show how much of what passes for genuine expression of public concern is really just a bought and paid-for (or, in the case of The Can, not sufficiently paid-for) front for plutocratic priorities.

 

Krugman’s blog, 11/8/13

November 9, 2013

There were three posts yesterday.  The first was “Ideological Ratings:”

So S&P has downgraded France. What does this tell us?

The answer is, not much about France. It can’t be overemphasized that the rating agencies have no, repeat no, special information about national solvency — especially for big countries like France. Does S&P have inside knowledge of the state of French finances? No. Does it have a better macroeconomic model than, say, the IMF — or for that matter just about any one of the men and women sitting in this IMF conference room with me? You have to be kidding.

So what’s this about? I think it’s useful to compare IMF projections for France with those for another country that has been getting nice words from the raters lately, the UK. The charts below are from the WEO database — real numbers through 2012, IMF projections up to 2018.

First, real GDP per capita:

So France has done better than the UK so far, and the IMF expects that advantage to persist.

Next, debt relative to GDP:

France is slightly less indebted, and the IMF expects this difference to widen a bit.

So why is France getting downgraded? Because, S&P says, it hasn’t carried out the reforms that will enhance its medium-term growth prospects. What does that mean?

OK, another dirty little secret. What do we know — really know — about which economic reforms will generate growth, and how much growth they’ll generate? The answer is, not much! People at places like the European Commission talk with great confidence about structural reform and the wonderful things it does, but there’s very little clear evidence to support that confidence. Does anyone really know that Hollande’s policies will mean growth that is x.x percent — or more likely, 0.x percent — slower than it would be if Olli Rehn were put in control? No.

So, again, where is this coming from?

I’m sorry, but I think that when S&P complains about lack of reform, it’s actually complaining that Hollande is raising, not cutting taxes on the wealthy, and in general isn’t free-market enough to satisfy the Davos set. Remember that a couple of months ago Olli Rehn dismissed France’s fiscal restraint — which has actually been exemplary — because the French, unacceptably, are raising taxes rather than slashing the safety net.

So just as the austerity drive isn’t really about fiscal responsibility, the push for “structural reform” isn’t really about growth; in both cases, it’s mainly about dismantling the welfare state.

S&P may not be participating in this game in a fully conscious way; when you move in those circles, things that in fact nobody knows become part of what everyone knows. But don’t take this downgrade as a demonstration that something is really rotten in the state of France. It’s much more about ideology than about defensible economic analysis.

Yesterday’s second post was “ECB Thinking Explained:”

A correspondent sends me this picture, snapped from the river in Frankfurt, right near the ECB’s headquarters:

Yes: it’s the Confidence Ferry!

Lord, I’d love to sit down and have a drink with Krugman.  His sense of humor is a treasure.  Yesterday’s last post was “Friday Night Music: San Fermin:”

Many thanks to the commenter who pointed me to this band — also featured on an NPR Tiny Desk Concert.

On the album — which is a concept piece, telling a story — the female vocalists are none other than Holly Laessig and Jess Wolfe of the terrific Lucius, whom I’ve featured several times. For the touring band, they’ve found … well, just listen, and marvel. Wow.

Krugman’s blog, 10/28/13

October 29, 2013

There were three posts yesterday.  The first was “The Confidence Gnomes:”

It’s kind of sad, but I suspect that half a century from now the main thing people will remember me for — if they remember anything — is the confidence fairy. So maybe I can somewhat package my attempts to debunk the Hellenization of our discourse (pdf) by pointing out that the scare stories seem to involve invoking a related set of characters, the confidence gnomes. (They’re also related to these guys.)

The popular story — put out by everyone from Alan Greenspan to Erskine Bowles — runs like this:

1. Loss of investor confidence
2. ??????
3. Greece!

What I keep asking is for someone to explain step 2 in a way that’s consistent with the fact that America, Britain, and Japan — unlike Greece — have their own currencies, and central banks that control short-term interest rates. Are you saying that they will raise these rates, and if so, why? Are you saying that long rates will become delinked from short rates? Why, and why can’t central banks prevent this just by buying long-term debt?

So far, nobody has answered this challenge clearly. They simply assert that this is how it will happen, or they switch arguments in midstream, suddenly bringing in the specter of bank collapse or something else. Just tell me what’s supposed to be happening to monetary policy!

And don’t tell me that this is what experience shows. There simply aren’t historical precedents for the claimed crisis — a debt crisis in a country that has its own currency and borrows in that currency. France in the 20s comes closest, but it didn’t play out anything like modern Greece. Japan right now is, in effect, an example of a country benefiting by reducing confidence in the future real value of its debt. (Before commenting on these assertions, read the paper.)

What’s more, we have a clear recent example of just how important it is to think these things through. Remember that people like Greenspan insisted that budget deficits would lead to soaring rates and inflation. But they never explained how this was supposed to happen in a depressed economy with zero short-term rates. Again, their logic was more or less

1. Deficits
2. ?????
3. Zimbabwe!

Meanwhile, those of us who tried to think it through concluded that nothing of the sort would happen — and it didn’t.

Count me as someone who believes that macroeconomics — at least of the Keynesian variety — has actually worked pretty well these past five years. The problem is that so few economists have been willing to use their own models, and so few influential people have understood that gut feelings are no way to deal with a once-in-three-generations economic crisis.

Yesterday’s second post was “Three Centuries of Debt and Interest Rates:”

Aha — somehow I didn’t know this existed. The Bank of England has produced some very, very long-term series; spreadsheet can be downloaded here. Here’s debt and interest rates since the Bank was founded:

The print is a bit small, but the blue line is the ratio of public debt to GDP, measured on the right axis, and the red line is the yield on long-term government debt, measured on the left.

You might think that these data, and the relationship they show — or, actually, don’t show — should have some impact on our current debate, especially given the tendency of many players to reject modeling and appeal to what they claim are the lessons of history.

Or are they claiming that this time is different?

The last post yesterday was “Poetry and Blogging:”

A non-economics, non-policy post; I just want to give a shoutout to a book I’m reading, and really enjoying: Tom Standage’s Writing on the Wall: Social Media — The First 2,000 Years. I’ve been a big fan of Standage’s ever since his book The Victorian Internet, about the rise of the telegraph, which shed a lot of light on network technologies while also being great fun. Now he’s done it again.

Standage’s argument is that the essential aspects of social media — exchange of information that runs horizontally, among people who are affiliated in some way, rather than top-down from centralized sources — have been pervasive through history, with the industrial age’s news media only a temporary episode of disruption. As he shows, Cicero didn’t get his news from Rome Today or Rupertus Murdochus — he got it through constant exchanges of letters with people he knew, letters that were often both passed on to multiple readers and copied, much like tweets being retweeted.

Even more interesting is his discussion of the Tudor court, where a lot of the communication among insiders took place through the exchange of … poetry, which allowed people both to discuss sensitive topics elliptically and to demonstrate their cleverness. You could even build a career through poetry, not by selling it, but by using your poems to build a reputation, which could translate into royal favor and high office — sort of the way some people use their blogs to build influence that eventually leads to paying gigs of one kind or another. The tale of John Harington — of the famous “treason never prospers” line — is fascinating.

Incidentally, when and why did we stop reading poetry? Educated people used to read it all the time, or at least pretend to; that’s no longer the case. Frankly, I don’t read poetry except on very rare occasions. What happened?

Anyway, interesting stuff. And since I don’t think Standage is likely to get favors showered on him by our latter-day Queen Elizabeth, buy his book!

And so he introduces me to another author I should read…

Krugman’s blog, 9/19/13

September 20, 2013

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

No, not Galt, Balt. En route to Brookings, to discuss Blanchard et al on Latvia. Paper and comments embargoed until delivery, so I’ll wait, but some very civilized economic discussion to come, later today if I can find time.

The second post was “Latvian Adventures:”

The paper by Blanchard, Griffiths, and Gruss is here (pdf). Some bemusement among the non-international-macro types about why a long session devoted to a country roughly the same size as either Nebraska or Brooklyn, take your pick. But a good discussion all the same. My take:

What to Make of Latvia?

Paul Krugman

Blanchard, Griffith, and Gruss have given us a terrific paper on Latvia, welcome for its tone as well as its content. Latvia has become a symbol in the fiscal policy wars, with austerity advocates elevating it to iconic status; the temptation must have been strong either to validate that elevation, or turn the paper into an exercise in debunkery. Instead, the authors give us a detailed, balanced account – one that highlights, in particular, just how odd, how inconsistent with orthodoxies of either side, the Latvian experience seems to be.

So let me dive right in to the two big issues the paper raises: the puzzle of Latvia’s output gap, and the puzzle of its internal devaluation.

Here’s what we know for sure: Latvia suffered a huge, Depression-level economic contraction after 2007, followed eventually by a fast but as yet incomplete bounce-back – which the latest data suggest may be slowing – that has left unemployment much higher than it was pre-crisis. Actually, Latvia’s numbers from 2007 to 2013 look fairly similar to those for the United States from 1929 to 1935. Today, everyone considers America 1935 to have been still in the depths of the Great Depression, so that if we look at Latvia through the same lens it doesn’t look very good – better than, say, Greece, but not good.

However, the Latvian authorities tell a very different story, and BGG basically agree. They argue that 2007 is a misleading base – that the Latvian economy on the eve of crisis was wildly overheated, with a positive output gap of something like 12 percent. And they correspondingly conclude that Latvia has in large part already recovered more or less fully.

BGG don’t arrive at this conclusion lightly. But I do think we want to ask how plausible it is.

First of all, on a conceptual level, how does an economy get to operate far above capacity? We understand operating below capacity: producers may fail to produce as much as they want to if there isn’t enough demand for their products. But how does excess demand induce producers to produce more than they want to?

OK, New Keynesian models actually have a sort of answer: the economy is monopolistically competitive, so that producers in general charge prices above marginal cost and are hence willing to produce more given the demand. But there has to be some limit to this margin; is 12 percent really plausible?

Second, how often do we see the kind of huge positive gap posited for Latvia? Or to ask a question we can actually answer, how often does the IMF estimate output gaps that big? I’ve gone through the IMF’s World Economic Outlook Database, looking at all advanced countries since 1980, to identify double-digit positive output gaps. Here’s the full list:

Estonia 2007
Greece 2007
Italy 1980
Luxembourg 1991

I have no idea what was going on in Italy 1980 or Luxembourg 1991. I doubt that anyone believes that Greece was operating 10 percent above capacity in 2007; surely what we’re seeing is the problem with the methods the Fund uses to estimate potential output, which basically use a weighted average of actual output over time. These methods automatically interpret any sustained decline in actual output as a decline in potential, and they cause that re-estimate to propagate backward through time. So the catastrophe in Greece ends up producing the basically silly conclusion of a hugely overheated economy before the crisis.

Oh, whatever is going on in Estonia presumably bears some relationship to what’s going on in Latvia.

The point is that if Latvia really was as hugely over capacity as they claim – and to be fair they don’t use the filtering method, they use careful assessment of unemployment and inflation – it represents a more or less unique case.

And arguing that Latvia was vastly over capacity in 2007 has another, perhaps surprising implication: it makes much of the debate over both austerity and internal devaluation moot.

On austerity: if we were really looking at an economy with a double-digit inflationary output gap, even the most ultra-Keynesian Keynesian would call for fiscal austerity. Grant the output gap interpretation, and the fiscal policy debate evaporates.

So, to an important degree, does the internal versus external devaluation debate. Here’s a plot of Latvian growth, at an annual rate, versus the one-year change in the current account balance as a percentage of GDP:

There was a strong relationship both before and after the crisis, but if anything stronger before the crisis. One way to say this is that that given the slump in Latvian output after 2007, you should have expected a huge external adjustment from that fact alone. Maybe Latvia didn’t need a devaluation of any kind, external or internal. Maybe it wasn’t overvalued, just overheated.

That said, BGG also provide evidence of a substantial internal devaluation, at least as measured by unit labor costs. Oddly, however, almost none of this comes via lower wages: wages in manufacturing have been every bit as flat as those of us who warned about downward nominal wage rigidity would have predicted. Instead, what we see is a rapid rise in productivity, which they suggest is the result of eliminating X-inefficiency.

There is, however, an alternative interpretation. Latvia is a relatively poor European country playing catch-up, and it had rapid productivity growth before the crisis. Here’s aggregate labor productivity from Eurostat:

Eurostat

Maybe Latvia just had an impressive productivity trend, owing to its particular position in the European system, and simply returned to that trend after a brief setback.

How does this bear on the internal devaluation debate? Well, if Latvia had very high productivity growth for whatever reason, the big thing advocates of currency flexibility worry about – the downward rigidity of nominal wages – just wasn’t a binding constraint.

So, suppose we go with this story: Latvia was a hugely, perhaps uniquely overheated economy that even a Keynesian would agree needed a lot of fiscal austerity, with very high rates of productivity growth making wage stickiness irrelevant. I’m not sure I believe this story, but if you do, what lessons does Latvia hold for other countries, and the euro in general?

And the answer, in brief, is none. Latvia’s story as I’ve just told it looks nothing like anything we’ve seen in the past, and probably not like anything we’re likely to see in the future – including, by the way, Latvia’s future. So I’m a little puzzled by the authors’ sanguine view about a Latvian entry into the euro; the next time there’s a euro crisis – and there will be another one, someday – there’s no reason to believe that anyone will be able to adjust in the way that Latvia, maybe, has.

 

Guest columnist today

June 26, 2013

T. M. Luhrmann, a professor of anthropology at Stanford, is a guest columnist this morning, since Maureen Dowd and Thomas L. Friedman are off today.  In “C. S. Lewis, Evangelical Rock Star” she says C. S. Lewis’s “Chronicles of Narnia” offers theological complexity, not simplicity — a chance to hang on to God in a secular age of doubt.  Here she is:

In 2005, Time magazine called C. S. Lewis the “hottest theologian” of the year — 42 years after his death. That same year, a cover story in Christianity Today hailed him as a “superstar.” To this day Lewis, who published the first of his children’s books about “Narnia” in 1950, remains deeply compelling for many evangelicals, more so than for Catholics and mainline Protestants. Why?

Lewis’s remarkable combination of theological simplicity and tweedy British scholarship is no doubt one reason for his appeal. In his famous book “Mere Christianity,” adapted from a series of BBC radio talks during World War II, Lewis laid out a clear assertion of what it meant to be Christian. Molly Worthen, a historian of religion, points out that nearly a century after the Scopes trial, many evangelicals still worry that secular intellectuals regard them as country bumpkins. Christians like Lewis have helped to keep that sense of cultural inferiority at bay.

But the text for which Lewis is best known is his “Chronicles of Narnia.” And what “Narnia” offers is not theological simplicity, but complexity. The God represented in these books is not quite real (it’s fiction) and yet more real than the books pretend (that’s not a lion, it’s God). That complexity may help people to hang on to faith in a secular society, when they need a God who is in some ways insulated from human doubt about religion.

The story of Bob, a man I got to know while writing a book on evangelical belief, offers some insight here. He grew up in a strict evangelical church in Southern California, but he thought it dishonest and manipulative. He remembers seeing, as a child, videos of violent and vengeful Old Testament stories, images of people sent to hell for seemingly arbitrary reasons. He concluded that this was meant to scare people into choosing Jesus.

Bob married young — too young — and soon divorced. After that, he was no longer welcome in his church. He left for graduate school still a Christian, but with his faith in turmoil. He asked God to help him deal with his distress. Three nights later, he saw on his pillow a vision of Aslan, the lion Lewis created to represent God/Jesus in “Narnia.” Bob described Aslan as glittering gold, with a mane that moved as if it were blowing in the wind. A few months later, he had an image of Aslan tattooed on his chest — to remind him, he said, of whom God had called him to be.

What Aslan gave Bob was a sense that God was real and loved him, even though he did not trust the humans who told him all he had been taught about God. This sense that the human church isn’t always to be trusted crops up in many of the newer evangelical churches. People talk about being “church wounded” and say things like “this isn’t about church, it’s about a real God.”

In “Mere Christianity,” Lewis wrote that to pretend helps one to experience God as real. In “Narnia” he offered a way to pretend — by depicting a God who is so explicitly not a God from an ordinary human church. Aslan keeps God safe from human clumsiness and error.

What does it mean that our society places such a premium on fantasy and imagination? “No culture,” observes the child psychologist Suzanne Gaskins, “comes close to the level of resources for play provided by middle-class Euro-American parents.” In many traditional societies, children play by imitating adults. They pretend to cook, marry, plant, fish, hunt.

“Inventive pretend,” in which children pretend the fantastic or impossible (enchanted princesses, dragon hunters) “is rarely — if ever — observed in non-industrialized or traditional cultures,” Gaskins says. That may be because inventive play often requires adult involvement. Observing the lack of fantasy play among the Manus children in New Guinea, Margaret Mead noted that “the great majority of children will not even imagine bears under the bed unless the adult provides the bear.”

Westerners, by contrast, not only tolerate fantasy play but actively encourage it, for adults as well as for children. We are novel readers, movie watchers and game players. We have made J. K. Rowling very wealthy.

This suggests that we imagine a complex reality in which things might be true — materially, spiritually, psychologically. Science leads us to draw a sharp line between what is real and what is unreal. At the same time, we live in an age in which we are exquisitely aware that there are many theories, both religious and scientific, to explain the world, and many ways to be human.

Probably fiction does for us what the vision of Aslan did for Bob: it helps us to learn what we find emotionally true in the face of irreconcilable contradictions. That is what Joshua Landy, a professor of French literature, argues in “How to Do Things with Fictions”: fiction teaches us how to think about what we take to be true. In the cacophony of an information-soaked age, we need it.

If you’ve never read “The Screwtape Letters” by C. S. Lewis I heartily recommend it also.

Krugman blog, 6/13/13

June 14, 2013

Just one post yesterday, “Is This (Still) The Age of the Superstar?”:

This will be a quick piece, because I have a very busy morning. But Alan Krueger gave a fun talk at the Rock and Roll Hall of Fame, in which he used evidence of growing inequality among musical artists as a jumping off point for a discussion of broader inequality issues. As he notes, there is a widely known theory from Rosen actually called the superstar theory, which could explain the takeoff of the 1 percent, in rock and in life.

But I was struck by the fact that his chart of growing inequality in the music business cut off in 2003. A lot has happened in the decade since: basically, the music business has been hugely disrupted by the Internet. I’d be very curious to know whether that hasn’t changed the calculus: radio play matters much less, the audience has fractured, performers can build a following on Pandora and Youtube.

And we also seem to be seeing a general shift in the sources of rising inequality, from inequality in compensation to good old-fashioned capital versus labor.

So I wonder if even Alan Krueger is now behind the curve here — and in any case I’d love to see how the trend for the music business looks since 2003.

 


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