Krugman’s Blog, 2/18/13

He was busy yesterday, with 5 posts.  The first was “The Great Dollar Decline:”

Matt O’Brien is covering the continuing Scarborough freakout over bearded prophets of non-doom; better him than me. I would say that JoScar is making progress. He seems to have graduated from frantic appeals to imagined authority — nobody else is saying what that guy says! — to efforts to make his case with actual data. Unfortunately, you really need some background knowledge — actually, quite a lot of background knowledge — before you try using economic data to tell stories, a point O’Brien makes abundantly clear.

But this particular episode jogged me into doing something I’ve been meaning to do for a while: talk about the causes of the big decline in the dollar during the Bush years. As O’Brien says, it’s ludicrous to blame this pre-crisis decline on deficits that only ballooned after the crisis struck; it’s also bizarre to think of the dollar’s decline as a tragedy, when it actually took place in the context of mostly low inflation and a growing economy. Still, what was actually going on?

First, we need some perspective. Here’s the 40-year history of the real dollar:

What you see right away is that the dollar fluctuates a lot, so impressions of big decline depend a lot on your starting point. Think of it this way: maybe the question isn’t why the dollar fell so much during the Bush years, but rather why it was so strong during the late Clinton years. (The tech boom/bubble is an obvious answer).

It’s also interesting to ask who the dollar declined against. And the main answer is Canada and Europe, which together account for more than a third of the overall dollar index. Here’s the exchange rate against the euro and the exchange rate against the loonie; both are nominal, not real rates, but since Canadian and European inflation rates are low and close to ours, that’s not a problem:

So: the euro was extraordinarily weak in the early 2000s (which I remember from a wonderful bike trip in Burgundy), reflecting teething troubles with the new currency. It recovered, and has stayed strong despite the crisis because of the refusal of the European Central Bank to match the easing of other central banks. Canada, meanwhile, saw its currency rise along with a great commodity boom.

In short, it’s not me, it’s you — the decline in the dollar under Bush probably had more to do with what was going on in our trading partners than with what was going on here. And in any case, again, it was not a problem for America.

Next up was “WWS 543, Trade Policy:  Classes 3 and 4”

Slides (pdf):

The political economy of trade policy

19th century trade policy

The third post of the day was “The Myth of Reagan’s Miracle:”

Ramesh Ponnuru has a rather sad piece in today’s Times, urging Republicans to revitalize themselves by emulating Reagan’s spirit rather than his specifics. Actually, it’s sad on two fronts.

First, Ponnuru wants the GOP to recognize the reality of growing inequality that has eliminated the connection between economic growth and middle-class incomes, to shift its focus away from tax cuts for the rich, and to drop the fixation with inflation and hard money in favor of a pragmatic approach. Well, there’s a name for people willing to be flexible in this way: they’re called Democrats. Think of the known views of Paul Ryan, who is undoubtedly his party’s intellectual leader (a fact that in itself tells you a lot about the party), and ask how he could conceivably accept any of this without admitting that he has spent his entire career being wrong about everything.

But it’s also really sad to see the continuing dominance of Reaganolatry. It’s not just that Reaganomics was a long time in the past — his big tax cut was 33, count them, 33 years ago. It’s also that Reaganomics was not a success!

Look at median family income. The basic story of postwar America is one of big gains in the first generation, near-stagnation in the second and after, with fluctuation due to the business cycle. And Reagan did not break that pattern:

If you want a better assessment, you can look at growth between business cycle peaks. (Peaks are much more similar than troughs; all happy economies are alike, each unhappy economy is unhappy in its own way.) Here’s what you get (treating the 1979-82 double dip as a single recession):

These periods don’t match up neatly with presidential terms. Still, if Reaganomics had been such a spectacular success, you would have expected the results by 1990 to have been families doing better than in the horrible 1970s; actually, not. The only clear things we see here are that the Clinton era was pretty good, while the Bush era was lousy even before the crisis.

So as I said, it’s sad: Ponnuru hopes to get Republicans to accept policies they’ll never accept, and the only way he knows to make his case is to invoke the memories of a politician from the quite distant past whose policies weren’t all that successful in the first place.

Of course, Ponnuru is an idiot…  The fourth post of the day was “WWS 594E, The Economics of the Welfare State: Class 2:”

Health care slides (pdf).

The last post of the day was “Goldbugs, Greece, and Affinity Fraud:”

Joe Weisenthal tries to understand why Barron’s, which he describes as a “quiet financial newspaper”, has a hysterical cover story about Obama turning America into Greece, Greece I tell you. So you might want to note that they’ve done this before. I don’t regularly read Barron’s or even notice what they’re saying, but I did note their frantic calls for a rise in interest rates back in October 2009, that’s right, 2009 — because inflation! confidence!

The truth is that Barron’s isn’t that different from the WSJ editorial page, which has also been warning about inflation and soaring interest rates for four years or more, and never seems daunted by being wrong again and again. Nor do readers seem to be put off.

Weisenthal basically puts it down to a marketing ploy; he notes that

there’s a very wide overlap between investment newsletter services, and cranky, anti-debt, armageddonism. It’s part of the pitch.

and he adds that

People always want to be told a story. And the doom story tends to have appeal among the older, conservative readers of these publications.

I’ve made much the same point, more offensively: I think of it as a form of affinity fraud, in which these publications (and various web sites too) reach out to readers by appealing to their shared hatred of snooty intellectuals who probably want to take all their money and give it to the 47 percent; since such people also tend to favor monetary and fiscal flexibility, there you have it.

The remarkable thing is that there seems to be no penalty at all for being wrong, consistently and repeatedly. Being their kind of guy is all that matters, even if it leads to terrible investment returns.



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