Krugman’s blog, 3/18/15

There were two posts yesterday.  The first was “No Business Like Show Business (Personal):”

A light Texas breakfast
A light Texas breakfast

I’m at SXSW; saw my first couple of sets last night. And right away I had a demonstration of why you want to see live performances.

I’ve been following San Fermin for a while, and they had a slot from 10 to 10:40 — which was nearly sabotaged by technical problems. The electricians kept coming on and off stage, while the band waited and waited — I don’t know what the problem was. Time drifted away — it was 10:10, then 10:20, the audience was growing restive, and I felt terrible for the performers, who seemed to be losing their chance to perform.

Then, finally, it was a go — and it was a totally explosive set, which left the band winded and disheveled, and had the audience roaring with enthusiasm.

What a great experience.

Yesterday’s second post was “Modern and Postmodern Recessions:”

As I mentioned yesterday, Romer and Romer have a new paper questioning the claim that recoveries are always slow after financial crises — and certainly slow recovery isn’t inevitable.

But I do think it’s important to realize that this dispute doesn’t invalidate a related point, namely, that the kind of recovery you can expect from a recession depends on the sources of that recession. Way back — before Lehman fell! — I argued that there was a distinction between modern and postmodern recessions. Pre-Great Moderation, recessions were brought on by the Fed, which raised rates to reduce inflation, then loosened the reins, producing a V-shaped recovery. Post-Great Moderation, with inflation low and stable, booms were allowed to run their course, so that recessions came from private-sector overreach — and the Fed had a much harder time engineering recovery. This was especially true after 2007, when we hit the zero sort-of lower bound.

You can see the difference clearly in a simple chart of interest rates and core inflation:

The recessions of 69-70, 73-5, and 81-82 were responses to inflation and the high rates the Fed imposed to fight it; the economy bounced back when the Fed was done. The recessions of 90-91, 2001, and 2007-9 were completely different.

And every time you hear someone claim that Obama failed because he didn’t have a Reaganesque business cycle, consider the comparison of monetary policy:

The Reagan recession involved a housing slump caused by the Fed, with a lot of pent-up demand that surged once the Fed had cut rates by 1000, that’s right, 1000 basis points. The Great Recession involved a housing slump that followed the mother of all bubbles, with a resulting overhang of both houses and debt — and interest rates could only fall a limited distance before hitting zero.

This doesn’t mean that a sustained slump was inevitable; we could have had a strong, sustained fiscal response. But that was prevented by the same people who now blame Obama for the delayed recovery.

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