Krugman’s blog, 5/1, 5/2, and 5/3/15

There were two substantive posts on Friday (if you’re dying for Friday music you’re on your own).  The first was “Bernanke and the Inflationistas:”

Ben Bernanke delivers a righteous smackdown of the Wall Street Journal editorial page:

It’s generous of the WSJ writers to note, as they do, that “economic forecasting isn’t easy.” They should know, since the Journal has been forecasting a breakout in inflation and a collapse in the dollar at least since 2006, when the FOMC decided not to raise the federal funds rate above 5-1/4 percent.

It has taken Ben almost no time in his blogging career to start sounding pretty much identical to Brad DeLong and perhaps other liberal econobloggers one might think of!

And BB is right, of course, that the WSJ has been consistently wrong on inflation, just as it has been consistently wrong on interest rates. It has spent a very long time peddling a specific kind of scare story — debt! printing presses! Zimbabwe! — that has been utterly wrong, but is never revised.

But what’s interesting here is that the Journal is far from alone in peddling this stuff — it’s also the staple of financial TV and many financial publications — and there are still many avid consumers after all these years of utter predictive failure.

We really need to stop pretending that this is any kind of rational argument. There’s something about inflation derp that goes straight to the ids of certain people — largely, one suspects, angry old men, though it would be nice to have hard evidence on the demographic. And they will keep regarding the Journal as the place to get the truth no matter how much money it costs them.

The second post on Friday was “Austerity and British Inflation:”

Tony Yates responds to Simon Wren-Lewis with a sort-of kind-of defense of the turn to austerity in 2010; I want to weigh in briefly, then turn to a point he reminds me of.

So, Yates first makes an argument that I agree with, that budget deficits can pose a problem even for countries that borrow in their own currencies if these countries also worry about inflation. Indeed. But that was never in dispute, at least on my end; the point was always limited to depressed economies where inflation would have been a benefit, not a cost.

He then argues that Britain had to be especially careful because of its financial sector. I still don’t understand the logic here, and am waiting for an explanation.

The interesting line, however, is Yates’s note that Britain had relatively high inflation in 2010-2011, which might have meant that the economy faced supply-side rather than demand-side problems, so contractionary policy might have been appropriate. My question is this: even if you accepted that argument, wasn’t that an argument for monetary rather than fiscal contraction? And if the BoE didn’t consider the evidence of overheating sufficient to justify pulling back on its quantitative easing, which had already tripled the size of its balance sheet, why should the Treasury have decided to tighten on its own?

After all, the basic logic of the situation is that you should wait until monetary tightening — until the central bank is starting to move off the zero lower bound — before fiscal consolidation. That way you can trade off fiscal tightening for a slower pace of monetary tightening, and avoid deepening the slump. But in 2010-2011 the British central bank wasn’t ready to tighten in any case, so fiscal policy should have waited.

And this brings me to my final point: the BoE was right.

I wrote at the time:

The story so far: Britain is currently experiencing relatively high headline inflation, more than 4 percent over the previous year. And so there are demands that the BoE tighten. Yet the bulk of the rise in inflation clearly represents temporary or one-time factors: a rise in value-added taxes as temporary breaks introduced during the recession expired, commodity prices, and the once-off effects of the fall in the value of the pound against the euro.

Nonetheless, the inflation hawks demand a rate rise, arguing that despite the still very depressed state of the economy, inflation must be nipped in the bud or it will turn into stagflation, 70s-style.

What we can hope for is that the BoE stays the course; and when inflation in the UK drops sharply, as it almost surely will, that will be an object lesson in the folly of always making policy as if it were 1979.

And so it proved.

There was one post on Saturday, “Poverty Policy Truths:”

Last year was the 50th anniversary of the War on Poverty, and the date provoked a flurry of studies correcting some widespread myths; perhaps most notable was an enlightening report from theCouncil of Economic Advisers.

What needed correcting? Basically, the “nation of takers” narrative, according to which we have been pouring ever-growing sums into helping the poor while making no dent in the poverty rate.

The reality is that spending on “income security” — which includes virtually everything except Medicaid that you could construe as aid to people with low incomes — has basically been flat for decades, with a temporary (and appropriate) spurt due to unemployment benefits and food stamps during the Great Recession:

If you don’t believe this, think about it: where are these big anti-poverty programs? We have EITC and food stamps; TANF, the successor to old-fashioned welfare, is a shadow of the former program. So where are these huge sums outside health care?

Meanwhile, it’s not true that poverty has been unchanged; the standard measure is known to be flawed, and a better measure shows progress, although not as much as we’d like:

So it is somewhat disheartening to see the thoroughly debunked narrative still emerging in some of the Baltimore-inspired discussion.

And there was one post yesterday, “US External Debt: A Curious Case:”

As Tim Taylor notes, the U.S. net international investment position — the difference between US assets abroad and foreign claims on the US — has moved substantially deeper into the red in recent years:

Bureau of Economic Analysis

But why? You might be tempted to say that it’s obvious: we’ve been running big budget deficits, borrowing the money from foreigners, so of course our debt to those foreigners is surging. But that story implicitly requires a surge in the trade deficit (or more precisely the current account deficit, which includes investment income), which hasn’t happened. In fact, current account deficits have been small compared with those of the bubble years:

So it’s not about borrowing vast sums abroad, it’s some kind of valuation effect. But what is it?

Well, I’ve taken the BEA data, and broken out two categories. First is cross-border equity holdings, both in the form of portfolio investment and the equity component of direct investment (which means investment that involves control, typically in the form of corporate subsidiaries). Second is debt, again both portfolio and direct investment-related. I express these claims as percentages of GDP, to correct for “normal” growth on both sides of the ledger. Here’s what I get:

Bureau of Economic Analysis

The big move is a sharp rise in the value of foreign holdings of US equity, not matched by any comparable rise in US holdings of foreign equity. What’s that about?

The answer, I believe, is that we’re looking at the differential performance of stock markets. Here, for example, is the S&P 500 compared with the euro area Stoxx:

Ecb, Fred

So the value of foreign holdings of US equities (and the imputed equity component of foreign direct investment) has surged along with the Obama stock market, while US holdings abroad have seen no comparable boost.

And this means that the plunge in the U.S. international investment position, far from showing weakness, is actually a symptom of US relative strength, reflected in strong stock prices.

I think I’m right about this, although happy to hear alternative stories.



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