Krugman’s blog, 5/4 and 5/5/15

There were three posts on Monday and one yesterday.  The first post on Monday was “Mediamacro Crosses the Atlantic:”

Simon Wren-Lewis has been on a lonely crusade against “mediamacro”, a narrative about the British economy that is untrue — or at the very least easily challenged and at odds with textbook economics — yet is stated in the news media not as a hypothesis but as a fact.

Sure enough, Dan Balz writes about Britain in the Washington Post, in what I think is supposed to be a news analysis rather than an opinion piece, and states the mediamacro narrative as simply the truth about Britain, with nary a hint even that anyone disagrees with the story.

While I’m at it, a bit of further evidence on the bogosity of claims that Labour was wildly irresponsible. Look at the IMF’s Article IV consultation from 2006. Article IVs are regular consultations intended to serve as a kind of early warning system; Fund staff review a country’s economy and policies and make non-binding recommendations. These consultations turn out to be valuable historical documents, because they provide evidence of the conventional wisdom at the time they were released.

Here’s the fiscal analysis from that report:

IMF

At the time, the IMF — like everyone else — believed that Britain was roughly at full employment (not, as is currently claimed, vastly overheated), so that the modest headline budget deficit was more or less equal to the structural deficit, and it projected a stable, low ratio of debt to GDP in the years ahead. Not a hint of concerns about fiscal profligacy.

It’s really astonishing that a narrative so much at odds with this easily checked recent history has completely taken over the discourse.

Monday’s second post was “Paranoia Strikes Derp:”

You may think that the big news story lately has been riots in Baltimore — or, if you have different priorities, either that boxing match or Kate’s baby. But in certain circles, the big thing has been the right-wing belief that operation Jade Helm 15, a military training exercise in Texas, is a cover for Obama to seize control of the state and force its citizens to accept universal health care at gunpoint.

No, really — and this is being taken seriously both by Ted Cruz and by the governor, who has ordered the National Guard to keep a watch on the feds and their possibly nefarious activities.

Before you pooh-pooh this, think about what would happen to a Democratic politician who gave similar credence to a left-wing conspiracy theory this far out. I can’t even think of what that conspiracy theory might be.

And this isn’t an isolated incident. You should think of the panic over the attack of the Obamacare black helicopters as being part of a continuum that runs through inflation truthers like Niall Ferguson and Amity Shlaes, who insist that the government is cooking the economic books, to QE conspiracy theorists like (sadly) John Taylor and Paul Ryan declaring that Bernanke only did it to bail out Obama, to the more general prevalence of inflation derp, the insistence that Weimar is just around the corner despite six or more years of failed predictions.

There’s something happening here. What it is ain’t exactly clear (although I have some ideas I’ll flesh out soon.) But it’s quite remarkable, and pretty scary.

Monday’s last post was “Explaining US Inequality Exceptionalism:”

Disposable income in the United States is more unequally distributed than in most other advanced countries. But why? The answer to that question has important implications for our understanding of inequality more generally, and also for policies intended to reduce inequality. And new work by my colleagues Janet Gornick and Branko Milanovic at the CUNY Graduate Center’s Luxembourg Income Study Center shed light on the question, partly overturning what all of us believed until recently. They explain their findings in the first Research Brief in a new series launched on the LIS Center website.

The standard story up until now has been that the source of US inequality exceptionalism lies in the unusually low amount of redistribution we do through our tax and transfer system. Figure 1, based on LIS data, shows Gini coefficients before and after taxes and transfers for a number of advanced economies. The US after-tax-after-transfer Gini is the highest of the group, but its pre-tax-pre-transfer Gini – the inequality of market income – isn’t all that special. What this figure suggests, then, is that it’s all about redistribution rather than about market inequality.

But can this be right? We know that the US has unusually weak unions, a low minimum wage, an exceptionally wide skills premium and, of course, an exceptionally imperial one percent. Shouldn’t all this leave some mark on market income?

What Gornick and Milanovic realized (helped by suggestions from a number of colleagues, notably Larry Mishel at EPI) was that true US market inequality might be being masked by another exceptional piece of the US system – delayed retirement, causing many older households to have positive market income where comparable households in other countries have no or very little market income. Thus, putting all households together and looking at their pre-tax-pre-transfer income inequality makes other countries’ distributions appear comparatively more unequal because people in other countries are more likely to retire earlier than in the US (and hence have zero or low market income).

To correct for this possible problem, they recalculated the numbers for households containing only persons under age 60, getting Figure 2. The US remains the most unequal nation (after taxes and transfers), but now a main driver of that inequality is market inequality. In this figure, the US (along with Ireland and the UK) has market income inequality substantially higher than the rest of the countries. In other words, it is the distribution of wages and income from capital, independent of the fiscal system, that makes the US comparatively unequal. Indeed, America also does less redistribution than several other rich countries, European countries in particular, so that’s still part of the story, but it’s not the whole story or even most of it.

This result has strong relevance to policy debates. There has been considerable discussion lately of the “new” conventional wisdom on labor which argues that interventions to strengthen workers’ bargaining power can reduce inequality and raise wages with little or no damage to the economy. If it were really true that all international differences in inequality were due to after-market, tax-and-transfer interventions, this would cast doubt on the new view. But it turns out that market income distributions differ quite a lot – and the US emerges as among the most unequal.

So this is an important new result.

Yesterday’s post was “Veg-O-Matic Egonomics:”

All successful researchers have gigantic egos. If they didn’t — if they did not have, at the core of their being, a frightening level of intellectual arrogance — they would never have had the temerity to decide that they had insights denied to all the extremely clever scholars who preceded them. And it takes even more egotism to persist in the face of all the people who will, in fact, tell you that your insight is trivial, it’s wrong, and they said it in 1962.

So we’re all monsters, however nice we may seem in person. But there’s still the matter of self-awareness and self-control — the ability to set limits, to avoid the temptation to spend your life claiming that the insights you had decades ago were the final word on the subject, maybe even the final word on all subjects.

Which brings me to the case of John Taylor. Taylor has been harshly critical of the Fed, which he claims caused the financial crisis by failing to pursue his policy rule from the early 1990s precisely; Ben Bernanke, now that he’s free to speak his mind, has responded by firmly smacking Taylor upside the head. Taylor has lashed back. And it’s really sad.

It’s not just that, as Tony Yates patiently explains, Taylor’s claims about the proven optimality of his rule are just false. (Maybe it is optimal, but it’s far from proved, and there’s certainly no consensus.) More disturbing, at this point Taylor seems intent on selling his rule as the Veg-O-Matic of economic policies. It slices! It dices! It solves the problem of the zero lower bound! (As Yates says, this claim appears incomprehensible.)

In fact — and I wish both Yates and Bernanke were clearer about this — Taylor’s central claim about the alleged errors of monetary policy is bizarre. The Taylor rule was and is a clever heuristic for describing how central banks try to steer between unemployment and inflation, and perhaps a useful guide to how they ought to behave in normal times. But it says nothing at all about bubbles and financial crises; financial instability is impossible in the models usually used to justify the rule, and the rule wasn’t devised with such possibilities in mind. It makes no sense, then, to claim that following the rule just so happens to be exactly what we need to avoid crises. It slices! It dices! It prevents housing bubbles and stabilizes the financial system! No, I don’t think so.

As I said, it’s all very sad.

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