Krugman Blog 2/1/13

No posts on 1/31/13, but 4 today.  First is “Our Incredible Shrinking Government:”

Most analysts are, rightly, shrugging off the surprise report of an actual decline in 4th quarter GDP. It will probably be revised away, and in any case it’s the result of one-off factors: a drop in inventories and a quirky sharp decline in defense spending.

Still, the report does highlight the role that shrinking government purchases of goods and services are playing in holding the economy back. And yes, I mean shrinking, not just growing more slowly than I’d like. Transfer payments like Medicare and Social Security are rising (although unemployment benefits are falling), but government purchases of stuff — mostly at the state and local level, where the stuff in question includes hiring schoolteachers — has been in fairly rapid decline.

Here’s a comparison, using the BEA numbers, of the relevant numbers in the current business cycle and during the Bush-era recession and aftermath:

By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity.

How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower.

So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent. It’s a policy disaster.

Next up he posted “Memo to Deficit Scolds:  I Hear What You’re Saying:”

I just think it’s kinda dumb.

Neil Irwin has a very good piece on economists versus pundits on the deficit, which is however marred by a half-hearted attempt to squeeze the issue into a standard views-differ-on-shape-of-planet framework — neither side understands the other’s concerns, they’re talking past each other, etc..

Actually, I understand perfectly well where the deficit scolds are coming from; I just don’t think it makes any sense, for reasons I’ve explained at length, and which Irwin mostly lays out as well. (Missing from his analysis is the sheer difficulty of telling a story about how we get in trouble even if investors get worried about our debt).

There’s no comparable level of understanding on the other side; indeed, Joe Scarborough and, as far as I can tell, Bowles/Simpson/Peterson etc. are under the delusion that my views are way out of the economics mainstream, whereas the truth, as Irwin says, is that very similar if less colorfully expressed views are held by many and probably most economists in the business world, major policy institutions like the Fed and the IMF, and so on.

There isn’t any symmetry here; my side of the debate is actually paying attention both to the numbers and to the arguments of the other side, while the Very Serious People only listen to each other.

The third post of the day was “Moveable Feast Macroeconomics:”

Ah, Paris in the 1920s. It was the era of Hemingway and F. Scott Fitzgerald, Gertrude Stein and Alice B. Toklas, sovereign debt and stabilization. Wait, what?

OK, I’ve written before about the notion that France in the 20s offers the closest thing I can find in the historical record to a crisis of the kind the deficit scolds keep warning us about. We’re not at all like Greece; we have our own currency, and our debts are in that currency. So we can’t run out of cash, even if the bond vigilantes turn out to be real and lose faith in America. At worst, we’re something like France in the 1920s, with its floating exchange rate and large wartime debt — except that our debt isn’t nearly as bad as a share of GDP, and we don’t have the lingering gold standard mentality that prevailed across the Western world back then.

So, what actually happened to 1920s France?

France emerged from World War I with very large debts. Here’s a comparison, using the IMF debt database, with the country the deficit scolds use to scare us nowadays:

The striking thing, of course, is the sharp decline in the debt to GDP ratio. How did that happen? Actually, it happened thanks to speculators, who turned on France in 1926, sending the franc sharply lower (yay, FRED has NBER macrohistory data!):

This in turn led to a large rise in prices, eroding the real value of the debt:

So, how did this affect the real French economy? Actually, France grew strongly during the 1920s. It suffered a severe but brief recession associated with the Poincare stabilization of the franc — largely, I believe, because of the sudden fiscal austerity — but it didn’t last:

Then came the Great Depression, but that’s another story.

Now, France was far deeper in debt than we are, and its politics were arguably even more dysfunctional than those of early 21st-century America. Even so, however, French debt didn’t cause anything like the kind of apocalypse that deficit scolds routinely promise unless we do what they say. There was no sustained economic downturn — nothing at all like the hell Greece, Spain, Portugal, and Ireland are going through; and while there was a burst of inflation, there was nothing like Weimar or Zimbabwe either.

I know that the scolds want their apocalypse; they really, really want to believe that unless we do their bidding incredibly terrible things will happen. But the most relevant historical example I can find offers no support at all for their scare-mongering.

He ended the day with a video in “Friday Night Music: The Lone Bellow:”

So many great new bands:

The Lone Bellow — “You Never Need Nobody”

All I ever

And that’s where the post ended…


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