Krugman’s blog, 4/7/15

There were three posts yesterday.  The first was “The Fiscal Future II: Not Enough Debt?”:

Continuing my meditation on Brad DeLong’s meditation on the fiscal future. Brad doesn’t just argue that governments should be bigger in the future; he also argues that governments have historically not had enough debt, and should have more.

Why? Because, he says, r-g — the difference between the real rate of interest on government debt and the rate of economic growth — has been consistently negative. Why is this significant?

Well, we normally imagine that if a government engages in deficit spending now, it will have to engage in compensating austerity of some form later — even if it doesn’t plan to pay of the debt, it will still have to cut spending or raise taxes so as to run a primary, non-interest surplus if it wants to stabilize the ratio of debt to GDP.

But when r is less than g, a higher debt stabilizes itself: erosion of the debt ratio by growth means that no primary surplus is needed. So you can eat your cake and have it too. A bigger debt lets the government do useful things, like invest in infrastructure; it gives investors the safe assets they want; and it need not lead to any future pain as long as you don’t do foolish things like join a currency union with no well-defined lender of last resort.

But is r really less than g for all major players? Brad uses the average interest rate on debt, which I haven’t had time to compute. What I’ve done is use the 10-year bond rate — which is somewhat higher than the rate Brad uses, I believe — and examine the G7 over the period 1993-2007. And I think we get some interesting insights.

First, all of the G7 paid roughly the same real interest rate, using GDP deflators to measure inflation:

As I’ve noted before, this doesn’t mean that the Wicksellian natural rate was the same everywhere; in the case of Japan, at least, the actual rate was well above the rate consistent with full employment. In any case, however, arbitrage looks quite strong.

However, countries differed a lot in their growth rates, so that r-g varies considerably. And this raises the question, did the “right” countries have a lot of debt?

Compare debt ratios in 2007 with r-g estimated over the 1993-2007 period:

For English-speaking members of the G7, r-g is slightly positive, but would be negative if I used a broader interest definition. But it was much higher in Japan, Italy, and Germany, which all had slow growth over this period — and Japan and Italy also had high debt. (The causation almost surely ran from slow growth to high debt, not the other way around.)

This suggests, I think, that Brad’s case for higher debt, while powerful, doesn’t apply to everyone. It’s a good case for English speaking members of the G7 and also for Germany looking forward (the 10-year index yield is -1 percent). Unfortunately, the biggest debt accumulations have come in economies that have much lower growth — mainly demography in Japan, productivity collapse in Italy.

No strong moral here, but I do think we need to be careful not to assume that the US case generalizes to everyone. Hellenization — assuming that we’re all Greece — has been a big problem in recent years; but Americanization — assuming that the US is representative — could be a problem too.

Yesterday’s second post was “Economics of Love:”

Not love as in romance; love as in tennis, meaning zero. Cecchetti & Schoenholtz argue that “zero matters” in macroeconomics; specifically, both the zero almost-lower bound on interest rates and downward wage rigidity make the case that deflation or for that matter very low inflation is a bad thing.

Just to note: This is exactly the point I’ve made a number of times, talking about the two zeroes. Not complaining here — many people have made this point, and we need them to keep making it.

The message instead is for those people — you know who you are — who imagine that the macroeconomics in this blog and in my column is somehow way out there on the left. In reality, I’m almost depressingly mainstream. It’s the other side in these debates that is showing lots of creativity, coming up with novel and innovative arguments about why we should do stupid things.

The last post yesterday was “Rand Paul and the Empty Box:”

Nate Cohn tells us that Rand Paul can’t win as a libertarian, because there basically aren’t any libertarians. And that’s true. I wish I could say that Rand Paul can’t win because he believes in crank monetary economics, etc. But the truth is that these things matter much less than the fact that not many Americans consider themselves libertarian, and even those who do are deluding themselves.

But why? Think of a stylized representation of issue space:

You might be tempted to say that this is a vast oversimplification, that there’s much more to politics than just these two issues. But the reality is that even in this stripped-down representation, half the boxes are basically empty. There ought in principle, you might think, be people who are pro-gay-marriage and civil rights in general, but opposed to government retirement and health care programs — that is, libertarians — but there are actually very few.

There’s also a corresponding empty box on the other side, which is maybe even emptier; I don’t even know a good catchphrase for it. (Suggestions?) I’m putting in “hardhats” to show my age, because I remember the good old days when rampaging union workers — who presumably supported pro-labor policies, unemployment benefits, and Medicare — liked to beat up dirty hippies. But it’s hard to find anyone like that in today’s political scene.

So why are these boxes empty? Why is American politics essentially one-dimensional, so that supporters of gay marriage are also supporters of guaranteed health insurance and vice versa? (And positions on foreign affairs — bomb or talk? — are pretty much perfectly aligned too).

Well, the best story I have is Corey Robin’s: It’s fundamentally about challenging or sustaining traditional hierarchy. The actual lineup of positions on social and economic issues doesn’t make sense if you assume that conservatives are, as they claim, defenders of personal liberty on all fronts. But it makes perfect sense if you suppose that conservatism is instead about preserving traditional forms of authority: employers over workers, patriarchs over families. A strong social safety net undermines the first, because it empowers workers to demand more or quit; permissive social policy undermines the second in obvious ways.

And I suppose that you have to say that modern liberalism is in some sense the obverse — it is about creating a society that is more fluid as well as fairer. We all like to laugh at the war-on-Christmas types, right-wing blowhards who fulminate about the liberal plot to destroy family values. We like to point out that a country like France, with maternity leave, aid to new mothers, and more, is a lot more family-friendly than rat-race America. But if “family values” actually means traditional structures of authority, then there’s a grain of truth in the accusation. Both social insurance and civil rights are solvents that dissolve some of the restraints that hold people in place, be they unhappy workers or unhappy spouses. And that’s part of why people like me support them.

In any case, bear this in mind whenever you read some pontificating about a libertarian moment, or whatever. There are almost no genuine libertarians in America — and the people who like to use that name for themselves do not, in reality, love liberty.



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