Krugman’s blog, 9/4/15

September 5, 2015

There was one post yesterday, “The Fed Should Remember the 90s:”

I’m (a) having a good time (b) jet-lagged to the point of madness, so posting limited. But I do want to weigh in on the latest job report and the Fed.

Headline unemployment, at 5.1 percent, is now quite low by historical standards, and the baying for a rate increase is louder than ever. But inflation is subdued, indeed below target, and wages are still going nowhere. Should the Fed be raising rates in the name of “normalization”?

Well, consider the situation in 1997, when the unemployment rate dropped through 5 percent. The Fed did raise rates a quarter point, but then stopped, waiting for inflation to become a problem — which it never did, even though unemployment continued to fall, eventually to 4 percent.

The lesson is that the Fed really doesn’t know what level of U3 constitutes full employment, and should be very cautious about acting preemptively absent any signs of inflation problems.

Why is this time different? Many people seem to think that the case for raising rates is made stronger by the fact that we’re currently at zero, which seems weird and unnatural. But if you actually think through the logic, it’s the other way around. When the Fed funds rate was 5 percent, there was room to cut if a rate hike turned out to be premature — that is, the risks of moving too soon and moving too late were more or less symmetrical. Now they aren’t: if the Fed moves too late, it can always raise rates more, but if it moves too soon, it can push us into a trap that’s hard to escape.

Hiking rates now is still a really bad idea — and the arguments for that bad idea just keep getting worse.

Nocera and Kristof

September 5, 2015

In “A Silver Lining to Brazil’s Troubles” Mr. Nocera says that the economy is in tatters, but the country’s handling of a huge corruption case shows its democracy and judicial institutions are working.  Mr. Kristof considers “Refugees Who Could Be Us” and says the drowning death of a 3-year-old Syrian, Aylan Kurdi, reflected a systematic failure of world leadership.  Here’s Mr. Nocera:

Of all the BRICS, Brazil would seem, on the face of it, to be in the worst shape.

BRICS, of course, stands for Brazil, Russia, India, China and South Africa, a catchphrase that was meant to connect their rapidly growing economies. But that was then. Today, their economies are sluggish at best, and their prospects no longer seem so bright.

Everybody knows about China’s troubles: its falling stock market, its slowing economy and the amateurish attempts by the government to revive them, as if they should somehow snap to when the Communist Party gives an order.

Russia’s problems are also well known: In addition to the annexation of Crimea, and the ensuing Western sanctions, the Russian economy has slowed with the decline of the price of fossil fuels, its primary export. The South African economy is in such trouble that even its president, Jacob Zuma, described it as “sick.” Although India grew by 7 percent in the second quarter, that number was below expectations, and in any case, probably overstates the health of the economy, Shilan Shah of Capital Economics told BBC News.

And then, sigh, there’s Brazil. Inflation? It is closing in on 10 percent. Its currency? The real’s value has dropped nearly in half against the American dollar. Recession? It’s arrived. The consensus view is that the Brazilian economy will shrink by some 2 percent in 2015. Meanwhile, “between 100,000 and 120,000 people are losing their jobs every month,” says Lúcia Guimãraes, a well-known Brazilian journalist.

Compounding the economic problems, many a result simply of poor economic stewardship, a huge corruption scandal has swept up both Brazilian politicians and a number of prominent businesspeople. The scandal centers on the country’s biggest company, Petrobras, whose success had been an object of real pride during the go-go years.

Although the details are complicated, as its core the scandal is “an old-fashioned kickback scheme,” as The Times’s David Segal put it in a fine story last month — a kickback scheme that has been estimated at a staggering $2 billion.

Politicians and members of the business elite alike have been arrested. The country’s president, Dilma Rousseff, who was the chairwoman of Petrobras while much of the scheme was taking place, hasn’t been accused of anything, but her approval rating is in the single digits. People have taken to the streets to call for her impeachment, though there are really no grounds yet to impeach her.

Political corruption has long been a fact of life in Brazil, but rarely has it been on such vivid, and nauseating, display.

The double whammy of scandal and recession has created a mood that combines outrage, anguish and resignation. But there is something else, too. “People feel betrayed,” says Guimãraes. Rousseff’s party, the Partido dos Trabalhadores (PT) — or Workers’ Party — came to office in 2003 promising, idealistically, to create social programs that would help the poor join the middle class. Between 2003 and 2011, according to one estimate, some 40 million people have climbed from abject poverty to the lowest rung on the middle class.

“The worst thing,” a Brazilian friend of mine wrote in an email recently, “is this feeling of disappointment with the … PT, which brought so much hope to the middle class. I’d call this feeling a kind of political depression.”

And yet, as I look over the BRICS, I think there is more hope for Brazil than some of its fellow members. Admittedly, I am a lover of Brazil, and want to see it succeed, and so was pleased when, as I made phone calls and emails for this column, a surprising silver lining emerged.

It is this: For all the pain Brazilians are going through right now, its democracy and its judicial institutions are working.

“What I see, more than I’ve ever seen before, is that the country is weathering this storm,” says Cliff Korman, an American musician who has lived and taught in Brazil for decades. It has a free press, which has stayed relentlessly focused on the Petrobras scandal. It has prosecutors who are actually putting politicians and businessmen in prison, and bringing cases against companies. The judiciary is not backing down.

“Corruption is such a part of public life,” says Riordan Roett, the director of Latin American Studies at Johns Hopkins School of Advanced International Studies. “But now people are being held accountable. There is a sense that things could actually change.”

And unlike a half-century ago, when a military dictatorship overthrew a president whose left-wing programs it didn’t like — and held power for the next 21 years — there is no hint that such a thing could happen today. No matter how the economy goes, Brazilians are going to be able to choose their own leaders, and in so doing chart their own course.

“It is the beginning of a new Brazil,” Roett says optimistically. It couldn’t happen to a nicer country.

Now here’s Mr. Kristof:

Watching the horrific images of Syrian refugees struggling toward safety — or in the case of Aylan Kurdi, 3, drowning on that journey — I think of other refugees. Albert Einstein. Madeleine Albright. The Dalai Lama.

And my dad.

In the aftermath of World War II, my father swam the Danube River to flee Romania and become part of a tide of refugees that nobody much cared about. Fortunately, a family in Portland, Ore., sponsored his way to the United States, making this column possible.

If you don’t see yourself or your family members in those images of today’s refugees, you need an empathy transplant.

Aylan’s death reflected a systematic failure of world leadership, from Arab capitals to European ones, from Moscow to Washington. This failure occurred at three levels:

■ The Syrian civil war has dragged on for four years now, taking almost 200,000 lives, without serious efforts to stop the bombings. Creating a safe zone would at least allow Syrians to remain in the country.

■ As millions of Syrian refugees swamped surrounding countries, the world shrugged. United Nations aid requests for Syrian refugees are only 41 percent funded, and the World Food Program was recently forced to slash its food allocation for refugees in Lebanon to just $13.50 per person a month. Half of Syrian refugee children are unable to go to school. So of course loving parents strike out for Europe.

■ Driven by xenophobia and demagogy, some Europeans have done their best to stigmatize refugees and hamper their journeys.

Bob Kitchen of the International Rescue Committee told me he saw refugee families arriving on the beaches of Greece, hugging one another and celebrating, thinking that finally they had made it — unaware of what they still faced in southern Europe.

“This crisis is on the group of world leaders who have prioritized other things,” rather than Syria, Kitchen said. “This is the result of that inaction.”

António Guterres, the head of the U.N. refugee agency, said the crisis was in part “a failure of leadership worldwide.”

“This is not a massive invasion,” he said, noting that about 4,000 people are arriving daily in a continent with more than half a billion inhabitants. “This is manageable, if there is political commitment and will.”

We all know that the world failed refugees in the run-up to World War II. The U.S. refused to allow Jewish refugees to disembark from a ship, the St. Louis, that had reached Miami. The ship returned to Europe, and some passengers died in the Holocaust.

Aylan, who had relatives in Canada who wanted to give him a home, found no port. He died on our watch.

Guterres believes that images of children like Aylan are changing attitudes. “Compassion is winning over fear,” he said.

I hope he’s right. Bravo in particular to Icelanders, who on Facebook have been volunteering to pay for the flights of Syrian refugees and then put them up in their homes. Thousands of Icelanders have backed this effort, under the slogan “Just because it isn’t happening here doesn’t mean it isn’t happening.”

Then there are the Persian Gulf countries. Amnesty International reportsthat Saudi Arabia, Kuwait and the United Arab Emirates haven’t accepted a single Syrian refugee (although they have allowed Syrians to stay without formal refugee status). Meanwhile, Saudi Arabia’s bombings of Yemen have only added to the global refugee crisis.

We Americans may be tempted to pat ourselves on the back. But the U.S. has accepted only about 1,500 Syrian refugees since the war began, and the Obama administration has dropped the ball on Syria — whether doing something hard like using the threat of missiles to create a safe zone, or something easy like supporting more schools for Syrian refugee children in neighboring countries.

Granted, assimilating refugees is difficult. It’s easy to welcome people at the airport, but more complex to provide jobs and absorb people with different values. (In Jordan, I once visited a refugee family hoping for settlement in the United States and saw a poster of Saddam Hussein on the wall; I wondered how that adjustment would go.)

In any case, let’s be clear that the ultimate solution isn’t to resettle Syrians but to allow them to go home.

“Stopping the barrel bombs will save more refugees dying on the route to Europe than any other action, because people want to return to live in their homes,” noted Lina Sergie Attar, a Syrian-American writer and architect.

There has been a vigorous public debate about whether the photo of Aylan’s drowned body should be shown by news organizations. But the real atrocity isn’t the photo but the death itself — and our ongoing moral failure to save the lives of children like Aylan.

And let us all be thankful — MoDo is off today.

Brooks and Krugman

September 4, 2015

In “The New Romantics in the Computer Age” Bobo babbles that the tasks where humans will continue to stand out above technology are mostly soft and squishy relational stuff.  In the comments “gemli” from Boston had this to say:  “Here we have some very practical advice for living in the modern world, assuming, of course, that you don’t have to eat or buy a house.”  Prof. Krugman considers “Other People’s Dollars, and Their Place in Global Economics” and says the countries behind greenbacks, Aussies, loonies and kiwis all weathered economic storms better than most of the rest of the world.  Here’s Bobo:

Just once I’d like to have a college student come up to me and say, “I really wanted to major in accounting, but my parents forced me to major in medieval art.” That probably won’t happen. It always seems to be the parents who are pushing their children in the “practical” or mercenary direction.

These parents are part of the vast apparatus — college résumés, standardized tests, the decline of humanities majors — that has arisen to make our culture more professional and less poetic.

But you see a counterreaction setting in. You see, here and there, signs of a new romanticism.

Ironically, technological forces may be driving some of the romantic rebirth. As Geoff Colvin points out in his book “Humans Are Underrated,” computers will soon be able to do many of the cognitive tasks taught in places like law schools and finance departments.

Computers can already go through millions of legal documents and sort them for relevance to an individual case, someday allowing one lawyer to do the work of 500. Computers may soon be able to cruise through troves of data and offer superior financial advice. Computers are not only getting smarter at systems analysis, they are improving at rates no human can match.

Colvin argues that improving your cognitive skills is no longer good enough. Simply developing more generic human capital will not help people prosper in the coming economy. You shouldn’t even ask, What jobs can I do that computers can’t do? That’s because they are getting good at so many disparate things. You should instead ask, What are the activities that we humans, driven by our deepest nature or by the realities of daily life, will simply insist be performed by other humans?

Those tasks are mostly relational. Being in a position of authority or accountability. Being a caregiver. Being part of a team. Transactional jobs are declining but relational jobs are expanding.

Empathy becomes a more important workplace skill, the ability to sense what another human being is feeling or thinking. Diabetes patients of doctors who scored high on empathy tests do better than patients with low-empathy doctors.

The ability to function in a group also becomes more important — to know how to tell stories that convey the important points, how to mix people together.

Secure workers will combine technical knowledge with social awareness — the sort of thing you get from your genes, from growing up in a certain sort of family and by widening your repertoire of emotions through reflection, literature and a capacity for intimacy.

Krugman’s blog, 9/2/15

September 3, 2015

There was one post yesterday, “Bubblewashing:”

Almost 15 years have passed since I warned about media “balance” that involved systematically abdicating the journalistic duty of informing readers about simple matters of fact. As I said way back when,

If a presidential candidate were to declare that the earth is flat, you would be sure to see a news analysis under the headline ”Shape of the Planet: Both Sides Have a Point.” After all, the earth isn’t perfectly spherical.

So have things improved? In some ways, they may have gotten even worse. These days, media balance often seems to involve retroactively rewriting history to avoid telling readers that one side of a policy debate got things completely wrong.

In particular, when you see reports on monetary disputes, you often see characterizations of what the Fed’s right-wing critics have been saying that go something like this, in the WaPo:

Among the criticisms: The Fed was keeping interest rates artificially low and fueling speculative bubbles. The helicopter-drop of money known as quantitative easing did little more than inflate stock markets and fund Washington’s deficit spending. The bailout of big banks left them bigger than ever.

Um, no. The people who gathered at the anti-Jackson-Hole event weren’t warning about bubbles and too-big-to-fail. They warned, in apocalyptic terms, that runaway inflation was just around the corner. Here’s Ron Paul; here’s Peter Schiff.

Why would a reporter credit the Fed’s critics with warnings they didn’t give, and fail to mention what they actually said? The answer, pretty obviously, is that if you were to say “Ron Paul has been predicting runaway inflation ever since the Fed began its expansionary policies”, that would make it clear that he has been completely wrong. And conveying that truth — even as a matter of simple factual reporting — is apparently viewed as taking sides.

So what we get instead is a whitewashing of the intellectual history, in which Fed critics are portrayed as making arguments that haven’t been shown to be ridiculous. It’s a pretty sorry spectacle.

Blow and Kristof

September 3, 2015

In “Ratcheting Up the Rhetoric” Mr. Blow says demanding police fairness, oversight and accountability isn’t the same as promoting police hatred or harm. Mr. Kristof, in “Payday for Ice Bucket Challenges Mocked Slacktivists,” says the fund-raising campaign that went viral last year contributed to what scientists say is a breakthrough in A.L.S. research.  Here’s Mr. Blow:

Last week, Deputy Darren H. Goforth of the Harris County, Tex., Sheriff’s Department was executed at a gas station in a Houston suburb. It was a horrific scene.

As The New York Times reported, prosecutors said that a gunman approached Goforth from behind and “emptied his 15-round handgun into the back and the back of the head of the deputy, as witnesses watched in horror and surveillance cameras captured the shooting.”

Goforth was simply pumping gas.

His killing was shocking in its brazenness. Your heart sank for this man and his family. You wanted to make sense of something that seemed to make no sense. How could someone be so callous in the taking of a life?

And yet, there were no answers to be had.

The Harris County sheriff, Ron Hickman, admitted as much in a news conference: “We have not been able to extract any details regarding a motive at this point.”

But Hickman departed from proof and protocol to deliver a dangerous, unsupported political statement.

Hickman suggested that Goforth “was a target because he wore a uniform,” but offered no evidence of this.

Hickman said further: “At any point when the rhetoric ramps up to the point where calculated, coldblooded assassinations of police officers happen, this rhetoric has gotten out of control. We’ve heard ‘black lives matter.’ All lives matter. Well, cops’ lives matter, too. So why don’t we just drop the qualifier and just say ‘lives matter,’ and take that to the bank.” Hickman offered no evidence that the shooting was connected to Black Lives Matter protesters.

The Harris County district attorney, Devon Anderson, said at the same news conference: “There are a few bad apples in every profession. That does not mean that there should be open warfare declared on law enforcement.”

Again, no evidence was offered that the killing was part of any “warfare” on law enforcement.

When a motive is discovered, the sheriff and district attorney may well be proved right, but you don’t make statements and then hope the facts support those statements. That’s operating in the inverse.

At this point, the “war on police” rhetoric is not only unsupported, it’s dangerous and reckless.

On one level, one might be able to understand the overheated language from these officials. A coworker had just lost his life in a brutal fashion. Emotions were high. The loss was still raw.

Furthermore, there was a protest over the weekend — which apparently took place after Goforth was shot — by a group of Black Lives Matter protesters at the Minnesota state fair in which some protesters were captured on video chanting, “Pigs in a blanket; fry ’em like bacon.” An organizer of that demonstration, Trahern Crews, told MSNBC’s Chris Hayes that the chant was chanted in a “playful” context as they joked back and forth with an officer monitoring the march.

That context is not at all apparent from the video. How you view this movement will inform how plausible you find the “playful” explanation. But whatever the context, I think we can all agree that at the very least, chants like that are ill advised in protests against police brutality. Many people took the chant literally, as a terrorist threat. And one can hardly blame them.

But many in the media who are hostile to the movement went even further, using the chant and Goforth’s tragic death as tools to support and promote a narrative that Black Lives Matter itself is a hate group that has declared war on the police, even though, at this point, there is no evidence whatsoever that the suspect, Shannon J. Miles, was affiliated with or influenced by the Black Lives Matter movement.

(We do know that Miles “spent four months in a mental hospital in 2012 after being declared incompetent to stand trial in an aggravated assault case,” according to The Houston Chronicle.)

The thing that many people have criticized the protesters for — exploiting a tragedy, rushing to judgment, putting narrative ahead of facts — was precisely what they did.

Over the weekend, the Fox News host Judge Jeanine Pirro asked her guest, Sheriff David A. Clarke Jr. of Milwaukee County: “Is it open season on law enforcement in this country?”

Clarke responded, in part: “I said last December that war had been declared on the American police officer led by some high profile people, one of them coming out of the White House, and one coming out of the United States Department of Justice. And it’s open season right now. There’s no doubt about it.”

On Sunday, Harry Houck, Jr., a CNN law enforcement analyst and retired New York Police Department detective, said on the network that “of course there’s anti-police rhetoric out there, you know, based on lies and assumptions, helping to promote the assassination of police officers out there.” He cited the chant by the Minnesota protesters, then continued, “I put them on the same — on the same line as I would the Ku Klux Klan or Black Liberation Army.”

On Monday morning, a co-host of “Fox and Friends,” Elisabeth Hasselbeck, asked the conservative commentator Kevin Jackson:

“Kevin, why has the Black Lives Matter movement not been classified as a hate group? How much more has to go in this direction before someone actually labels it as such?”

The Fox News host Bill O’Reilly said on his show on Monday that Black Lives Matter was a hate group and declared: “I’m going to put them out of business.”

There seems to be a concerted effort to defame and damage Black Lives Matter, and one has to wonder why.

It is impossible to credibly make the case that Black Lives Matter as a movement is a hate group or that it advocates violence. Demanding police fairness, oversight and accountability isn’t the same as promoting police hatred or harm.

I actually believe that you have to peel back the vitriol to expose the fundamental, but unarticulated truth at the core of the opposition to this movement: It centers blackness in a country that “others” blackness. It elevates blackness in a country that devalues it. It prioritizes blackness in a country that marginalizes it.

It demands fairness from a society rife with — and built on! — inequity. It forces America to confront its flaws rather than wishing them away. It drags the racial caste system this country created out of the shadows and into the light.

Black Lives Matter makes America uncomfortable because it refuses to let America continue to lie to itself. It targets police brutality, but the police are simply agents of the state and the state is representative of the totality of America.

Discomfort with Black Lives Matter, is, on some level and to some degree, a discomfort with blackness itself. It’s not only about the merits of individual cases, it is also about the collective, ingrained sins of the system committed disproportionately, and by design, against people of color. The movement convicts this country of its crimes.

America has been engaged since its inception in a most gruesome enterprise: Like the mythological Cronus, it has been eating its children, the darker ones, and this movement demands — at least in one area, at least in one moment — that it atone for that abomination.

Now here’s Mr. Kristof:

When Americans were giddily drenching themselves with ice water during the “ice bucket challenge” a year ago, the cognoscenti rolled their eyes.

The aim of the ice bucket challenge was to raise money to combat A.L.S., also known as Lou Gehrig’s disease, a neurodegenerative ailment that affects some 15,000 Americans and usually leads to death within five years. But commentators scoffed: One on Time.com declared it “problematic in almost every way.” Critics sniped that the challenge wasted water and cannibalized contributions to better causes that affect more people.

The ice bucket challenge was taken as emblematic of “slacktivism,” the derisive term for cheap ways to feel good without doing anything meaningful. Critics point to Internet campaigns, the Stop Kony movement and the ice bucket challenge as merely symbolic ways for young narcissists to preen without actually achieving any change.

But now we have evidence that the ice bucket challenge may have worked.

Scientists studying A.L.S. have reported a breakthrough that could lead to therapy, not just for A.L.S. but for other ailments, too. And they say the money raised in the ice bucket challenge was crucial.

The breakthrough, published in Science, was summarized thus: “TDP-43 repression of nonconserved cryptic exons is compromised in ALS-FTD.”

Got it?

Here’s a translation: The research focused on a protein called TDP-43 that in some circumstances is linked to cell death in the brain or spinal cord of patients. The scientists found that inserting a custom-designed protein allowed cells to return to normal.

“That becomes our therapeutic strategy,” said Philip Wong, a professor at Johns Hopkins University whose lab conducted the research. He said the research team was now testing gene therapy strategies in mice to see if these can halt A.L.S. symptoms.

If it works in mice, the following step would be to seek to conduct a clinical trial in humans, he said.

The researchers are also hoping the therapy will work for a common cause of mental deterioration, frontotemporal dementia, and for inclusion body myositis, a progressive disease that leads to muscle weakness.

Jonathan Ling, a Johns Hopkins scientist who was the lead author of the Science article, said the new work might also lead to a diagnostic test (though probably not a treatment) for Alzheimer’s. Ling said the research team was also working with experts on cancer and immunology to see if other proteins might perform similar roles as TDP-43, possibly leading to far broader implications.

The ice bucket challenge went viral in 2014, partly because it was so much fun to watch videos of celebrities or friends dumping ice water on their heads. Videos of people in the challenge have been watched more than 10 billion times on Facebook — more than once per person on the planet. (I was one of the 17 million who uploaded a video of my drenching to Facebook.)

The ALS Association says the ice bucket challenge raised $115 million in six weeks, and many participants have become repeat donors. Google also reports there were more searches for “A.L.S.” in 2014 than in the entire previous decade.

The research at Johns Hopkins on TDP-43 was already underway, but Wong says ice bucket money helped accelerate the work and allowed the team to conduct some high-risk, high-reward experiments that were critical to the outcome.

“The funding certainly facilitated the results we obtained,” he told me.

It’s true that slacktivism doesn’t always work. The online campaign to “bring back our girls” — the Nigerian schoolgirls kidnapped by Boko Haram last year — raised attention, but the girls are still missing.

Likewise, Joseph Kony, the warlord, is still on the run despite the Stop Kony movement. But the United States and African countries directed more resources against Kony, and this has had a very significant effect: Killings by his group are down 90 percent since 2011.

So think of armchair activism as a gateway drug. It exposes people to causes and sometimes gets them hooked. And while it doesn’t always solve problems, it tends to build awareness of crises — a necessary but not sufficient step to getting them resolved.

In any case, armchair activism is preferable to armchair passivity.

With the ice bucket challenge, there’s little evidence of cannibalization that hurt other causes, and it seems to have been revolutionary for this one.

“Across the A.L.S. community, we are probably in our highest time of hope,” said Barbara Newhouse, president of the ALS Association.

So if you endured an ice dunking a year ago — or if you’re participating in the 2015 ice bucket challenge, now underway — there’s no need to apologize for having fun. Rather: Thank you!

Enough with the eye-rolling. Long live slacktivism!

Krugman’s blog, 9/1/15

September 2, 2015

There were four posts yesterday.  The first was “Gravity:”

Now that’s fun: Adam Davidson tells us about trade in the ancient Near East, as documented by archives found in Kanesh — and reports that the volume of trade between Kanesh and various trading partners seems to fit a gravity equation: trade between any two regional economies is roughly proportional to the product of their GDPs and inversely related to distance. Neat.

But what does the seemingly universal applicability of the gravity equation tell us? Davidson suggests that it’s an indication that policy can’t do much to shape trade. That’s not where I would have gone, and it’s not where those who have studied the issue closelyhave gone.

Here’s my take: Think about two cities with the same per capita GDP — we can relax that assumption in a minute. They will trade if residents of city A find things being sold by residents of city B that they want, and vice versa.

So what’s the probability that an A resident will find a B resident with something he or she wants? Applying what one of my old teachers used to call the principle of insignificant reason, a good first guess would be that this probability is proportional to the number of potential sellers — B’s population.

And how many such desirous buyers will there be? Again applying insignificant reason, a good guess is that it’s proportional to the number of potential buyers — A’s population.

So other things equal we would expect exports from B to A to be proportional to the product of their populations.

What if GDP per capita isn’t the same? You can think of this as increasing the “effective” population, both in terms of producers and in terms of consumers. So the attraction is now the product of the GDPs.

Is there anything surprising about the fact that this relationship works pretty well? A bit. Standard pre-1980 trade theory envisaged countries specializing in accord with their comparative advantage — England does cloth, Portugal wine. And these models suggest that how much countries trade should have a lot to do with whether they are similar or not. Cloth exporters shouldn’t be selling much to each other, but should instead do their trading with wine exporters. In reality, however, there’s basically no sign of any such effect: even seemingly similar countries trade about as much as a gravity equation says they should.

Calibrated models of trade have long dealt with this reality, somewhat awkwardly, with the so-called Armington assumption, which simply assumes that even the apparently same good from different countries is treated by consumers as a differentiated product — a banana isn’t just a banana, it’s an Ecuador banana or a Saint Lucia banana, which are imperfect substitutes. The new trade theory some of us introduced circa 1980 — or as some now call it, the “old new trade theory” — does a bit more, and possibly better, by introducing monopolistic competition and increasing returns to explain why even similar countries produce differentiated products.

And there’s also a puzzle about both the effect of distance and the effect of borders, both of which seem larger than concrete costs can explain. Work continues.

Does any of this suggest the irrelevance of trade policy? Not really. Changes in trade policy do have obvious effects on how much countries trade. Look at what happened when Mexico opened up starting in the late 1980s, as compared with Canada, which was fairly open all along — and which, like Mexico, mainly trades with the US:

So what does gravity tell us? Simple Ricardian comparative advantage is clearly incomplete; the process of international trade is subtler, with invisible as well as visible costs. Not trivial, but not too unsettling. And gravity models are very useful as a benchmark for assessing other effects.

The second post yesterday was “Multipliers: What We Should Have Known:”

There’s a very nice interview with Olivier Blanchard, who is leaving the IMF, in which among other things Olivier says the right thing about changing one’s mind:

With respect to outside, the issue I have been struck by is how to indicate a change of views without triggering headlines of “mistakes,’’ “Fund incompetence,’’ and so on. Here, I am thinking of fiscal multipliers. The underestimation of the drag on output from fiscal consolidation was not a “mistake’’ in the way people think of mistakes, e.g., mixing up two cells in an excel sheet. It was based on a substantial amount of prior evidence, but evidence which turned out to be misleading in an environment where interest rates are close to zero and monetary policy cannot offset the negative effects of budget cuts. We got a lot of flak for admitting the underestimation, and I suspect we shall continue to get more flak in the future. But, at the same time, I believe that we, the Fund, substantially increased our credibility, and used better assumptions later on. It was painful, but it was useful.

Indeed. There are a lot of people out there whose idea of a substantive argument is “you used to say X, now you say Y” — never mind the reasons why you changed your view, and whether it was right to do so.It’s important not to fall into the trap of being afraid to let new evidence or analysis speak.

One thing I would say, however, is that on this particular issue the Fund should have known better. Olivier says that the evidence “turned out to be misleading in an environment where interest rates are close to zero and monetary policy cannot offset the negative effects of budget cuts”, but didn’t we know that? I certainly did.

And let me also beat one of my favorite drums: the prediction that multipliers would be much larger in a liquidity trap came out of IS-LMish macro (or, to be fair, New Keynesian models) and has been overwhelmingly confirmed by experience. So this was yet another victory for Keynesian analysis, the success story nobody will believe.

Yesterday’s third post was “The Triumph of Backward-Looking Economics:”

We don’t get to do many controlled experiments in economics, so history is mainly what we have to go on. Unfortunately, many people who imagine that they know how the economy works go with what they think they heard about history, not with what actually happened. And I’m not just talking about the great unwashed; quite a few well-known economists seem not to have heard about FRED, or at least haven’t picked up the habit of doing a quick scan of the actual data before making assertions about facts.

And there’s one decade in particular where people are weirdly unaware of the realities: the 1980s. A lot of this has to do with Reaganolatry: the usual suspects have repeated so often that it was a time of extraordinary, incredible success that I often encounter liberals who believe that something special must have happened, that somehow the events were at odds with what the prevailing macroeconomic models of the time said would happen.

But nothing special happened, aside from the unexpected willingness of the Fed to impose incredibly high unemployment in order to bring inflation down.

What did orthodox salt-water macroeconomists believe about disinflation on the eve of the Volcker contraction? As it happens, we have an excellent source document: James Tobin’s “Stabilization Policy Ten Years After,” presented at Brookings in early 1980. Among other things, Tobin laid out a hypothetical disinflation scenario based on the kind of Keynesian model people like him were using at the time (which was also the model laid out in the Dornbusch-Fischer and Gordon textbooks). These models included an expectations-augmented Phillips curve, with no long-run tradeoff between inflation and unemployment — but expectations were assumed to adjust gradually based on experience, rather than changing rapidly via forward-looking assessments of Fed policy.

This was, of course, the kind of model the Chicago School dismissed scathingly as worthy of nothing but ridicule, and which was more or less driven out of the academic literature, even as it continued to be the basis of a lot of policy analysis.

So here was Tobin’s picture:

Here’s what actually happened:

Unemployment shot up faster than in Tobin’s simulation, then came down faster, because the Fed didn’t follow the simple rule he assumed. But the basic shape — a clockwise spiral, with inflation coming down thanks to a period of very high unemployment — was very much in line with what standard Keynesian macro said would happen. On the other hand, there was no sign whatsoever of the kind of painless disinflation rational-expectations models suggested would happen if the Fed credibly announced its disinflation plans.

So how does the decade of the 1980s end up being perceived as a defeat for Keynesians? To see it that way you have to systematically misrepresent both what happened to the economy and what people like Tobin were saying at the time. In reality, Tobinesque economics looks very good in the light of events.

The last post yesterday was “Bad Ideas Down Under:”

I’m heading off to Sydney, for the Festival of Dangerous Ideas. Blogging will be limited due to travel, plus blood rushing to my head from standing upside down when I get there.

 

Friedman and Bruni

September 2, 2015

In “Our Radical Islamic BFF, Saudi Arabia” TMOW says the greatest purveyors of radical Islam aren’t the Iranians, as a general says. The Saudis win that title hands down.  Well, put me in the oven and call me a biscuit…  I never thought I’d live to see the day that a Very Serious Person actually said that out loud, in front of God and everyone.  Mr. Bruni, in “The Joe Biden Delusion,” says thed vice president commands enormous affection. That doesn’t mean he can win the Democratic presidential nomination.  Here’s TMOW:

The Washington Post ran a story last week about some 200 retired generals and admirals who sent a letter to Congress “urging lawmakers to reject the Iran nuclear agreement, which they say threatens national security.” There are legitimate arguments for and against this deal, but there was one argument expressed in this story that was so dangerously wrongheaded about the real threats to America from the Middle East, it needs to be called out.

That argument was from Lt. Gen. Thomas McInerney, the retired former vice commander of U.S. Air Forces in Europe, who said of the nuclear accord: “What I don’t like about this is, the number one leading radical Islamic group in the world is the Iranians. They are purveyors of radical Islam throughout the region and throughout the world. And we are going to enable them to get nuclear weapons.”

Sorry, General, but the title greatest “purveyors of radical Islam” does not belong to the Iranians. Not even close. That belongs to our putative ally Saudi Arabia.

When it comes to Iran’s involvement in terrorism, I have no illusions: I covered firsthand the 1983 suicide bombings of the U.S. Embassy and the U.S. Marine barracks in Beirut, both believed to be the handiwork of Iran’s cat’s paw, Hezbollah. Iran’s terrorism, though — vis-à-vis the U.S. — has always been of the geopolitical variety: war by other means to push the U.S. out of the region so Iran can dominate it, not us.

I support the Iran nuclear deal because it reduces the chances of Iran building a bomb for 15 years and creates the possibility that Iran’s radical religious regime can be moderated through more integration with the world.

But if you think Iran is the only source of trouble in the Middle East, you must have slept through 9/11, when 15 of the 19 hijackers came from Saudi Arabia. Nothing has been more corrosive to the stability and modernization of the Arab world, and the Muslim world at large, than the billions and billions of dollars the Saudis have invested since the 1970s into wiping out the pluralism of Islam — the Sufi, moderate Sunni and Shiite versions — and imposing in its place the puritanical, anti-modern, anti-women, anti-Western, anti-pluralistic Wahhabi Salafist brand of Islam promoted by the Saudi religious establishment.

It is not an accident that several thousand Saudis have joined the Islamic State or that Arab Gulf charities have sent ISIS donations. It is because all these Sunni jihadist groups — ISIS, Al Qaeda, the Nusra Front — are the ideological offspring of the Wahhabism injected by Saudi Arabia into mosques and madrasas from Morocco to Pakistan to Indonesia.

And we, America, have never called them on that — because we’re addicted to their oil and addicts never tell the truth to their pushers.

“Let’s avoid hyperbole when describing one enemy or potential enemy as the greatest source of instability,” said Husain Haqqani, the former Pakistani ambassador to Washington, who is an expert on Islam at the Hudson Institute.

“It is an oversimplification,” he said. “While Iran has been a source of terrorism in supporting groups like Hezbollah, many American allies have been a source of terrorism by supporting Wahhabi ideology, which basically destroyed the pluralism that emerged in Islam since the 14thcentury, ranging from Bektashi Islam in Albania, which believes in living with other religions, to Sufi and Shiite Islam.

“The last few decades have seen this attempt to homogenize Islam,” claiming “there is only one legitimate path to God,” Haqqani said. And when there is only one legitimate path, “all others are open to being killed. That has been the single most dangerous idea that has emerged in the Muslim world, and it came out of Saudi Arabia and has been embraced by others, including the government in Pakistan.”

Consider this July 16, 2014, story in The Times from Beirut: “For decades, Saudi Arabia has poured billions of its oil dollars into sympathetic Islamic organizations around the world, quietly practicing checkbook diplomacy to advance its agenda. But a trove of thousands of Saudi documents recently released by WikiLeaks reveals in surprising detail how the government’s goal in recent years was not just to spread its strict version of Sunni Islam — though that was a priority — but also to undermine its primary adversary: Shiite Iran.”

Or consider this Dec 5, 2010, report on BBC.com: “U.S. Secretary of State Hillary Clinton warned last year in a leaked classified memo that donors in Saudi Arabia were the ‘most significant source of funding to Sunni terrorist groups worldwide.’ She said it was ‘an ongoing challenge’ to persuade Saudi officials to treat such activity as a strategic priority. The groups funded include al-Qaeda, the Taliban and Lashkar-e-Taiba, she added.”

Saudi Arabia has been an American ally on many issues and there are moderates there who detest its religious authorities. But the fact remains that Saudi Arabia’s export of Wahhabi puritanical Islam has been one of the worst things to happen to Muslim and Arab pluralism — pluralism of religious thought, gender and education — in the last century.

Iran’s nuclear ambition is a real threat; it needs to be corralled. But don’t buy into the nonsense that it’s the only source of instability in this region.

Now here’s Mr. Bruni:

Many politicians seem intent on holding themselves as far back from us as possible, on parceling themselves out in only the smallest and most controlled bits. Even as they implore us to love them and insist that we trust them, they’re stingy. Cagey. Coiled.

Not Joe Biden. Where others say too little, he says too much. Where others depend on extravagantly compensated swamis to contrive their authenticity and coax them toward it, Biden needs help tamping down his irrepressible self.

How I’ve loved watching him over his decades in public life.

How I’d hate to see him enter the presidential race and punctuate those years with a final defeat.

Biden, Biden, Biden. The drumbeat swells, coming from all directions, even from Dick Cheney. He recently did an interview with CNN, the first snippets of which were shown on Monday, and offered Biden the following counsel about 2016: “Go for it.” This is probably the most compelling evidence that Biden shouldn’t. When Cheney itches for an intervention, beware.

Biden’s own moves, including a scheduled appearance next Thursday on “The Late Show With Stephen Colbert,” further stoke speculation and hopes.

But while many Democrats have enormous respect for him and he’s done plenty to deserve it, this isn’t really about him. It’s about Hillary Clinton: her presumptuousness, the whole email mess, the sloppy administration of the Clinton Foundation, the sense that scandals are as inextricable from her political identity as pantsuits.

Some Democratic leaders and operatives would desperately like an alternative — an alternative, that is, with better general-election prospects than a 73-year-old socialist with little support from minorities. Martin O’Malley hasn’t come through: He might as well be an apparition for all the impact he’s made. Someone else is needed. Cue the Biden talk.

We journalists eagerly amplify it, because nothing improves a narrative like the addition of an especially colorful character. We disingenuously pretend that his favorability ratings and other flattering poll results have the same meaning as corresponding numbers for Clinton and Bernie Sanders.

They don’t, because he’s a hypothetical candidate and they’re actual ones, and it’s the difference between a courtship in its dawn and a marriage in its dusk. Once someone has really moved into the house and is leaving dirty dishes in the sink, the electricity dims and everything droops.

Even while drooping, Clinton holds onto a great deal of support, and she stands on the very territory that Biden, to get the nomination, would need.

“He’s neither to the left of her, where the energy of the party is, nor is he newer than her,” one Democratic strategist said. “He personifies neither progressivity nor change. And you need to have one of the two — preferably, both — to win.”

Clinton’s familiarity is mitigated by the possibility that she’d make history: the first woman in the White House. Biden has nothing like that going for him.

He’s a profoundly awkward fit for this strange political moment, this season of outsiders and insurgents.

Voters are sour on career politicians, and Biden’s career in politics spans about 45 uninterrupted years.

Voters are anti-Washington in particular, and more than 42 of those years have been spent in the national’s capital, as a senator from Delaware and then as the vice president.

Aspects of his legislative record are more troubling for him now than ever before. As Nicholas Fandos noted in a recent story in The Times, Biden pushed for, and later crowed about, tough-on-crime legislation in the 1980s and 1990s that preceded the mass incarceration of today. That would be a wedge between him and the Democratic Party’s black voters especially.

And as Steve Eder noted in another recent story in The Times, Biden was, of necessity, an ambassador for the financial services industry in Delaware. That hardly positions him to win the favor of liberal Democrats who yearn for a crackdown on Wall Street.

Biden has twice before pursued the Democratic nomination and never won a single state. The last time, in 2008, he got less than 1 percent of the vote in the Iowa caucuses and then quickly dropped out.

And while much about circumstances and about Biden has changed since then, what hasn’t, at least not significantly, is the uncorked, uncensored quality that contributed to his troubles before.

He rolls his eyes. He reaches out with his hands. He talks and talks, in sentences that sometimes go too far, with words that haven’t been weighed as carefully as they could be. The route from his brain to his lips is direct and swift. None of the usual traffic cones there.

Sometimes this is enervating. Mostly it’s endearing. For better or worse, it’s not the means to a promotion, not for this remarkable man at this remarkable time.

Krugman’s blog, 8/31/15

September 1, 2015

There was one post yesterday, “The China Debt Zombie:”

Matthew Klein notes that Very Serious People are now worried that China’s troubles, which have caused it to switch rather suddenly from a buyer of Treasuries to a seller, will cause U.S. interest rates to spike. He rightly finds this unconvincing. What he doesn’t note is we’re looking at another instance of an economic zombie in action.

For the new concern about China is, in economic terms, the same as the old concern – that the Chinese could destroy our economy by cutting off funding, either for political reasons or out of disgust over our budget deficits. This always reflected a fundamental failure to understand the economic logic, as was pointed out many times not just by yours truly (and much earlier here)but also by people likeDan Drezner. But scare stories about our supposed financial dependence on China just keep shambling along, propounded by people who don’t even realize that there are other views, let alone that they’re talking nonsense.

Brooks and Nocera

September 1, 2015

Who better than Bobo to discuss Hillary Clinton?  (Well, there’s always MoDo’s foaming, gibbering rage but we’re trying for minimal coherence…)  In “Hillary Clinton, the Great Defender” Bobo gurgles that she has been playing defense most of her political career, and that’s given her strengths. But that mind-set also hurts her.  Of course there’s no mention of the fact that she’s been playing defense because of a series of trumped-up “scandals” ginned up by people that Bobo loves…  Mr. Nocera, in “Baylor, Football and the Rape Case of Sam Ukwuachu,” says the university didn’t let on about the accusation for nearly two years, but with its player’s conviction, it’s suddenly indignant and taking action.  Here’s Bobo:

Hillary Clinton has obviously had a bad summer. She’s losing in New Hampshire to Bernie Sanders, even among women. She’s barely leading him in Iowa. In a Quinnipiac poll of potential general election matchups, she’s beating Donald Trump by only four points, 45 to 41, and she’s beating Marco Rubio by only one point.

The conventional Democratic muck-a-muck view is that she horribly mishandled the private email server issue. That’s part of it, but the polling shows a much more pervasive personal set of weaknesses. In an AP/GfK poll, only 40 percent of Americans think she is compassionate. Only 30 percent say she is honest. In a variety of polls, many voters say she just doesn’t get people like them, usually the key Democratic strength.

Not all of these troubles are her fault. It’s tough to run as a member of the establishment in this time of popular disgust with establishments (ask Jeb Bush). But Clinton’s campaign nonetheless has a distinct aura. Maybe next to Michael Dukakis’s, it is the least romantic, poetic and uplifting Democratic campaign in decades.

All descriptions of her campaigns have to start with the fact that for most of Clinton’s political career she has been playing defense. Sometimes she’s had to defend herself from critical barrages amid scandal: Whitewater and the Rose Law Firm records straight through to Benghazi and the email server. Other times she’s had to endure emotional and media exposures sparked by her husband’s escapades.

Even when she ran for president in 2008, she was on the defense against the Obama tide. She campaigned best when the Obama tide was strongest and she was forced to struggle against it.

This pattern of playing on the defensive side of the ball has given her real strengths — she has endured and persevered and rarely bent. But this defensive posture has given her, at least in public, an embattled combative posture, and sometimes an air of reactiveness.

In her campaign speeches she describes a political, economic and global world that is red in tooth and claw. The main traits required to survive in this struggle against the contemptible foes are tenacity, toughness and calculation. There is a pervasive us/them assumption in her speeches, and the need for armoring up. The defining verb in her political campaign is “fight.”

In speeches she is at her best when describing people who have been pushed to the wall by circumstances — the single mom who is trying to find a way to pay for day care, the college student deluged with rising tuition costs. She can be quite funny in her speeches, but her humor is the humor of the counterattack — mostly sarcastic humor aimed at Republicans, the press and her critics.

The ironic fact is that she now bears the subliminal weight of scandals more heavily than Bill. That’s in part because he at least gives the appearance of putting any resentments he might have about them in the past. He seems emotionally loose, open and trusting. She often does not give that impression.

Even the campaign posture bears signs of this defensive mind-set. The walls around her inner circle are high. Gov. Martin O’Malley is certainly right when he says it is shocking that the Democratic primary process will feature a mere four debates before the first four states complete voting — a wall of protectiveness to seal off the front-runner.

This linebacker mentality means she is strong when she talks about defending, say, Social Security, and she has no illusions in foreign affairs. But there is little of the high-minded earnestness of the Adlai Stevenson campaigns, the futuristic aspiration of the John Kennedy campaign, the grand ambition of the Lyndon Johnson campaign, the new generation emotionality of Bill Clinton’s campaign or the uplifting hopefulness of the Barack Obama campaign.

We live in anxious times. You can respond to those times with a more radical political program, as Bernie Sanders is doing. You can answer with an anti-establishment burn-down-the-house campaign, as Donald Trump is doing. Or you can create a resurrection story, a creative narrative that builds a working majority on new grounds.

When Clinton was secretary of state it wasn’t clear whether she could go on offense and define a creative initiative in an open field. She hasn’t done that yet in this campaign, either. She hasn’t given voters a sense of an epic quest, an exodus to some promised land.

She’s still the prohibitive favorite to get the nomination, but we have yet to see if she can play offense. Campaigns do have to have some creative romance to them, an uplifting mood if not a new agenda. So far Clinton has not creatively defined a new field in front of the country. Instead, she’s left a void others are filling.

And now here’s Mr. Nocera:

On Aug. 21, a Baylor University football player named Sam Ukwuachu wassentenced to six months in the county jail and 10 years’ probation for sexually assaulting a freshman soccer player two years ago.

Although Ukwuachu pleaded not guilty to the charges, there wasn’t much doubt that “Jane Doe,” as she is referred to in court documents, had been raped. When she went to the hospital after the encounter, the examining nurse found “vaginal injuries, including redness, bleeding and friction injuries,” according to a powerful account in Texas Monthly. Jane Doe had been a virgin.

Her testimony during the short trial was nothing short of chilling. “He was using all of his strength to pull up my dress and do stuff to me,” she testified. “He had me on my stomach on the bed and he was on top of me.” Her head caught between the bed and a desk, she was “screaming ‘stop’ and ‘no’ ” as Ukwuachu raped her.

The day of Ukwuachu’s sentencing, Baylor’s president, Ken Starr — yes, the same Ken Starr who 17 years ago authored the lurid Starr Report about President Bill Clinton’s dalliance with Monica Lewinsky — issued a letter to the Baylor community denouncing “this unspeakable tragedy.” He insisted that Baylor works “tirelessly” to provide a safe environment and that perpetrators of sexual violence “will find no shelter on our campus.”

And then on Friday, Starr issued another statement, in which he announced the university would hire outside counsel to conduct an investigation. He also said Baylor would hire a full-time official to oversee “all student-athlete behavior.”

I will address the absurdity of the latter role shortly. But first, it’s worth taking a closer look at the case, which says a lot about the relationship between Baylor and its football team, very little of it good.

Is football big at Baylor? You bet it is. Its beautiful new McLane Stadium, opened last year, cost $266 million. The town of Waco, Tex., where Baylor is located, pretty much stops during a Baylor football game. Baylor’s top spokeswoman, Lori Fogleman, ends her voice mail message with an enthusiastic, “Sic ‘em Bears!”

The importance of having a good football team — and many prognosticators believe Baylor will be very good indeed this season — may help explain why it was willing to accept Ukwuachu in the first place. A talented defensive end, he had been dismissed from the Boise State team for undisclosed reasons, and conflicting accounts over the past two weeks have failed to clarify what Baylor knew about Ukwuachu at the time of his transfer.

During the trial, Ukwuachu’s former girlfriend at Boise State testified that he had been violently abusive with her, and records recently obtained by ESPN show Boise State officials were alarmed by Ukwuachu’s erratic and even suicidal behavior. According to the records, three days after he was given a diagnosis of a major depressive disorder, Ukwuachu was dismissed from the team. (Boise State insists it had no knowledge of the domestic abuse allegations at the time of Ukwuachu’s move to Baylor.).

In October 2013, while sitting out a year as a transfer, as required per N.C.A.A. rules, Ukwuachu raped Jane Doe. To be blunt, Baylor seemed mainly interested in protecting its football player. According to Texas Monthly, after conducting a few cursory interviews, and not even asking to look at the hospital rape kit, the school “cleared” Ukwuachu, as his lawyer later put it.

Not that anybody knew this, because Baylor said nothing publicly, not even after Ukwuachu’s indictment. In fact, when he failed to suit up for the 2014 season — and reporters began asking why — Baylor said only that he had “some issues.” Even with the indictment hanging over him, Ukwuachu was allowed to do conditioning work with the team.

As recently as this June, just two months before the trial, Baylor’s defensive coordinator said he expected the defensive end to play during the 2015 season. It was only as the trial was about to begin that The Waco Tribune-Herald reported Ukwuachu’s “issues” included a rape accusation.

Ken Starr was as complicit in the two-year-long silence as anybody in the Baylor athletic department, which makes his current “anguish” seem like little more than P.R. posturing. If you Google Starr, you’ll find plenty of pictures of him on the Baylor football field, cheering on the team.

But it’s at moments of crises like this one when people discover how a university, and its president, prioritizes athletics. Baylor, a Baptist school that professes to adhere to Christian principles, appears to have “sheltered” a “perpetrator,” to use Starr’s own words, because this particular perp might be able to help the team win a few games. It happens way too often.

As for the idea that someone has to be hired to monitor the behavior of the school’s 500 athletes — how, exactly, does Baylor propose to do that, send chaperones on their dates? — shouldn’t the real issue be who the school admits in the first place, and how forthrightly it acts when problems emerge? By this standard, Baylor’s response has been abysmal.

Indeed, judging by the Ukwuachu case, it’s not so much the athletes who need to have their behavior monitored. It’s Ken Starr’s administration.

Politeness forbids me from saying what I’d like to say about Ken Starr.

Krugman’s blog, 8/28 and 8/29/15

August 31, 2015

There was one post yesterday and two posts on Friday.  He didn’t post to his blog yesterday.  The first post on Friday was “1998 in 2015:”

David Beckworth has a good if possibly over-elaborate discussion of China’s flirtation with crisis. What I find striking is the extent to which China has managed to put itself into something like the situation many of its neighbors faced in the late 1990s. The renminbi “wants” to depreciate, partly because of a slowing economy and monetary easing, partly because of a crisis of confidence and capital flight. But Chinese authorities aren’t willing to let it drop all the way, perhaps because of fears of trade conflict but also perhaps because the private sector and state-owned enterprises now have a lot of foreign-currency debt.

What happened in 1997-1998 was that Asian depreciations turned into balance-sheet disasters, because domestic firms were highly leveraged and had lots of dollar debt. This debt soared as a share of GDP, not because of massive new borrowing, but because the denominator crashed as currencies plunged:


International Monetary Fund

I and others wrote about this at the time; you can see, by the way, why I get annoyed at assertions that economists paid no attention to debt until the 2008 crisis, but also why I’m annoyed at myself for not realizing how a housing crash could produce balance-sheet stress just as currency crashes did in 1998 Asia.

Anyway, it looks like time to dust off the extensive analysis that took place back then. Obviously there are some important differences between China 2015 and Indonesia 1998, including huge foreign exchange reserves but also what looks like a much bigger and more problematic overhang of internal debt. But we do have a lot of material to draw on; no need to reinvent everything from scratch.

Friday’s second post was “Fear of Asymmetry:”

David Roberts has a very nice essay on American politics, framed as an analysis of what nerds don’t get; but it’s not just nerds who seem weirdly blind to the reality here.

One problem with the essay, however, is that Roberts never really explains why people who pride themselves on their ability to think things through slide into lazy cliches when it comes to politics. And that’s important: just lecturing Silicon Valley types on the need to get serious about politics won’t work if there are deeper reasons smart people get stupid when politics enters the picture.

Here’s how I see it: it’s about self-image. Tech types like to imagine themselves above the fray, operating on a higher plane than those grubby political types. But if you get serious about US politics, you realize that this is actually an irresponsible pose. As Roberts says, the parties are not symmetric, and wisdom does not lie somewhere between the extremists on both sides. In fact, policies that the tech elite support, like carbon taxes, are supported only by the left wing of the Democratic Party; the entire Republican Party is controlled by climate denialists, and anti-science types more broadly. And in general the modern GOP is basically anti-rational analysis; it’s at war not just with the welfare state but with the Enlightenment.

But for an ubernerd to acknowledge this reality would be to sound, horrors, partisan. And so they refuse to go there; all their belief in data and careful analysis gets set aside when it comes to politics, because the political data — and there really are a lot of data on all this — tell you what they don’t want to hear.

As readers might guess, I face some personal frustration here. When it comes to economics, I try to base what I say on evidence and on models that have stood the test of confrontation with evidence; but I often encounter people who assume that I’m just a left-wing version of Stephen Moore. Why do they believe that? Have they actually looked at my analysis and track record? No, they just know that I’m much more critical of the right than of the left, and they assume that this means ipso facto that I’m biased. But what if in modern America the right is much more wrong than the left? Not a possibility they’re willing to contemplate.

So are efforts to change this futile? I hope not. Roberts may well have the right approach: keep stressing the evidence of political asymmetry. Maybe, maybe, someone will listen.

Saturday’s post was “Artificial Unintelligence:”

In the early stages of the Lesser Depression, those of us who knew a bit about the macroeconomic debates of the 1930s, and realized how relevant the hard-won insights of Keynes and Hicks were to the post-financial crisis world, often felt a sense of despair. Everywhere you looked, people who imagined themselves sophisticated and possessed of deep understanding were resurrecting 75-year-old fallacies and presenting them as deep insights.

A lot of water has passed under the bridge since then, and I at least no longer feel the same sense of despair. Instead, I feel an even deeper sense of despair — because people are still rolling out those same fallacies, even though in the interim those of us who remembered and understood Keynes/Hicks have been right about most things, and those lecturing us have been wrong about everything.

So here’s William Cohan in the Times, declaring that the Fed should “show some spine” and raise rates even though there is no sign of accelerating inflation. His reasoning:

The case for raising rates is straightforward: Like any commodity, the price of borrowing money — interest rates — should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.

Oh dear.

Cohan’s theory of interest rates is basically the old notion of loanable funds: the interest rate is determined by the supply of and demand for credit. As Keynes and Hicks explained three generations ago, this is a completely inadequate story — because it misses the reality that the level of income isn’t fixed, and changes in income affect the supply and demand for funds. So loanable funds doesn’t determine the interest rate; all it does is define a relationship between interest rates and income, the IS curve of the IS-LM model:

What determines where we end up on that curve? Monetary policy. The Fed sets interest rates, whether it wants to or not — even a supposed hands-off policy has to involve choosing the level of the monetary base somehow, which means that it’s a monetary policy choice.

And how would you know if the Fed is setting rates too low? Here’s where Hicks meets Wicksell: rates are too low if the economy is overheating and inflation is accelerating. Not exactly what we’ve seen in the era of zero rates and QE:

OK, there are arguments that the Fed should be willing to abandon its inflation target so as to discourage bubbles. I think those arguments are wrong — but in any case they have nothing to do with the notion that current rates are somehow artificial, that we should let rates be determined by “supply and demand”.

The worrying thing is that, as I’ve suggested, crude misunderstandings along these lines are widespread even among people who imagine themselves well-informed and sophisticated. Eighty years of hard economic thinking, and seven years of overwhelming confirmation of that hard thinking, have made no dent in their worldview. Awesome.


Follow

Get every new post delivered to your Inbox.

Join 167 other followers