Krugman’s blog, 5/7, 5/8 and 5/9/15

There was one post on 5/7, three on 5/8, and one on 5/9.  He didn’t post to the blog yesterday.  On 5/7 he posted “British Sovereign Risk, 2010:”

It’s election day in Britain, and God knows what will happen. But a lot of the campaign has revolved around the question of what was really going on in the spring of 2010. Cameron/Osborne want everyone to believe that Britain was in crisis, and was saved only by austerity. Is that really how it was?

Not according to the markets. Interest rates in the UK were low, but it’s not easy to use rate spreads as an assessment of risk — the way you can for eurozone countries — because Britain borrows in its own currency. So this is one place where CDS spreads may be informative.

Here, then, are CDS spreads in and around the election period of 2010, as reported by the Atlanta Fed:

The UK is that line at the bottom, just above the United States. (I continue to be bemused by the very idea of CDS on US debt, since a world with America in default is probably one of Mad Max anarchy, but never mind.) What you see is that the markets were never worried, at all, about British solvency.

The first post on 5/8 was “The Economy and the British Election:”

Just a reminder: The overwhelming evidence for US elections is that they are not judgements of an administration’s overall performance — they are driven by the rate of growth just ahead of the election, as in the chart above (taken from Larry Bartels.) (Any pointers to UK-specific work along the same lines would be welcome.) I’ve also put in the closest growth number I could get to the one Bartels uses for the US, taken from the ONS.

So you want to think of the economic environment for yesterday’s election as being roughly comparable to that facing Clinton in 1996. Pre-election polls suggested a close vote, but given that environment, we really shouldn’t be surprised that the incumbents did well.

That’s not to say that other things, like the distortions of mediamacro (driven by the overwhelming anti-Labour bias of the press) played no role.

The second post on 5/8 was “Stop-Go Austerity and Self-Defeating Recoveries:”

Sometimes good things happen to bad ideas. Actually, it happens all the time. Britain’s election results came as a surprise, but they were consistent with the general proposition that elections hinge not on an incumbent’s overall record but on whether things are improving in the six months or so before the vote. Cameron and company imposed austerity for a couple of years, then paused, and the economy picked up enough during the lull to give them a chance to make the same mistakes all over again.

They’ll probably seize that chance. And given the continuing weakness of British fundamentals – high household debt, a soaring trade deficit, etc. – there’s a good chance that the resumption of austerity will usher in another era of stagnation. In other words, the recovery of 2013-5, which is falsely viewed as a vindication of austerity, is likely to prove self-defeating.

There’s a somewhat similar problem in the euro area, as Barry Eichengreen noted recently. There, too, growth has picked up, thanks to a pause in austerity, quantitative easing and a weaker euro. The policies that pulled Europe back from the brink were made politically possible by fear, first of collapse, then of deflation. But as the fear abates, so does pressure to change Europe’s ways; austerians are already claiming the pickup as vindication, not of Draghi’s activism, but of the policies that made that activism necessary.

Obviously my pessimism here could be all wrong; if the private sector in Britain or Europe has more oomph that I think, growth can continue even with policy backsliding. But my guess is that we’re looking at an era of stop-go austerity, in which politicians who refuse to learn the right lessons from history doom their citizens to repeat it.

5/8’s third post was “What I Missed (Personal and Meta):”

The past is a cluttered country
The past is a cluttered country

My new office at the CUNY Graduate Center is small — so is my Princeton office, but it has more shelf space, not to mention enough books stacked on the floor to get me warnings from the fire marshal. So I’m culling my three-and-a-half decade collection drastically. The picture above shows the books I put out to be taken away today, which was day three; the books from the previous two days have already been taken away, and I expect to need all weekend to finish.

Many of the books I’m keeping are old conference volumes; for the most part, when I pick them up and wonder where they came from, it turns out that there’s a paper of mine inside. Either I had forgotten where that piece was published, or I had forgotten even writing it; if you’re a young academic reading this, trust me, it will happen to you.

Anyway, many of the forgotten conferences were about the Asian financial crisis of the 1990s, and when I look at my own papers, I see the elaboration of a basic theme. The crisis, I and others declared, was largely about debt, leverage, and balance sheets. There was compelling reason, we said, to believe that these factors created multiple equilibria, with self-fulfilling panic a real possibility. And in a couple of places I suggested that while the Asian crisis crucially involved exchange rates and debt in foreign currencies, essentially similar stories could unfold involving other asset prices.

So you can see why I bristle a bit at suggestions that economists don’t understand the possible role of nonlinearities, of multiple equilibria, of animal spirits, etc. etc.. I wrote so much about all that that I can’t even remember writing it!

And so I anticipated and predicted the actual crisis of 2008, right? Wrong. I had all the intellectual tools I needed, I even diagnosed a housing bubble, but I somehow failed to put the pieces together. Maybe I wasn’t as completely surprised as people who believed in the inherent stability of modern economies, and I caught on fast once the thing happened, but no, I didn’t see it coming.

Is there a moral here? I think it is that the world is a very complicated place, and it’s way too easy to miss what you should see even if your analytical framework is pretty decent. For me, at least, the great crisis came as a surprise but not a shock, something I didn’t see coming but not a deep problem for my sense of how the world works. Still, I do wish I’d paid more attention to the right things.

Saturday’s post was “Lost in Translation (Personal and Trivial):”

My office excavations have now dug down to a primitive early level in my history, containing various translations of my first trade book,The Age of Diminished Expectations. The Italians, it seems, wanted to put a Hannibal Lecter spin on it:

Or maybe they wanted to replace the invisible hand with the inaudible?

The Japanese had some interesting ideas about my sartorial tastes:

No particular moral, except that when it comes to such matters you can only hope that the ideas are more or less conveyed.

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