Krugman’s blog, 5/20 and 5/21/15

There were 2 posts on 5/20.  The first was “Conservatives and Keynes:”

Tony Yates asks, “Why can’t we all get along?” Lamenting another really bad, obviously political defense of austerity, he declares that

it’s disappointing that the debate has become a left-right thing. I don’t see why it should.

But the debate over business-cycle economics has always been a left-right thing. Specifically, the right has always been deeply hostile to the notion that expansionary fiscal policy can ever be helpful or austerity harmful; most of the time it has been hostile to expansionary monetary policy too (in the long view, Friedman-type monetarism was an aberration; Hayek-type liquidationism is much more the norm). So the politicization of the macro debate isn’t some happenstance, it evidently has deep roots.

Oh, and some of us have been discussing those roots in articles and blog posts for years now. We’ve noted that after World War II there was a concerted, disgraceful effort by conservatives and business interests to prevent the teaching of Keynesian economics in the universities, an effort that succeeded in killing the first real Keynesian textbook. Samuelson, luckily, managed to get past that barrier — and many were the complaints. William Buckley’s God and Man at Yale was a diatribe against atheism (or the failure to include religious indoctrination, which to him was the same thing) and collectivism — by which he mainly meant teaching Keynesian macroeconomics.

What’s it all about, then? The best stories seem to involve ulterior political motives. Keynesian economics, if true, would mean that governments don’t have to be deeply concerned about business confidence, and don’t have to respond to recessions by slashing social programs. Therefore it must not be true, and must be opposed. As I put it in the linked post,

So one way to see the drive for austerity is as an application of a sort of reverse Hippocratic oath: “First, do nothing to mitigate harm”. For the people must suffer if neoliberal reforms are to prosper.

If you think I’m being too flip, too conspiracy-minded, or both, OK — but what’s your explanation? For conservative hostility to Keynes is not an intellectual fad of the moment. It has absolutely consistent for generations, and is clearly very deep-seated.

The second post on 5/20 was “I’m With Stupid:”

Via FT Alphaville, James Montier has an interesting piece castigating economists for their “interest rate idolatry”, their belief that central bank-set interest rates matter a lot for the economy and that therefore it is useful, at least conceptually, to think about the “natural” rate of interest that would lead the economy to full employment. There is no evidence that interest rates matter in that way, he says, and economists who talk about natural rates are simply engaged in groupthink.

In particular, he identifies three blind and/or stupid economists leading everyone astray: Janet Yellen, Larry Summers, and yours truly.

Well, it could be true; there’s plenty of stupidity in the world, and much of it imagines itself wise. But in my experience people who declare confidently that “economists don’t understand X” usually turn out to be wrong both about X and about what economists understand. As I wrote in one context, often what they imagine to be a big conceptual or empirical failure is just a failure of their own reading comprehension.

Let me also say that if you were going to look for economists who blindly repeat doctrine, without the intelligence or courage to challenge conventional wisdom, neither Janet Yellen nor Larry Summers would be top picks.

So Montier offers a lot of evidence that interest rates move a lot, which isn’t news to anyone, and then one argument he apparently thinks is a big thing economists don’t know — that business investment is basically unaffected by interest rates. Who would have suspected such a thing? Well, everyone. Here’s what I wrotesome years ago:

Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we used to hear a lot about the monetary “transmission mechanism” — how the Fed actually got traction on the real economy. Both the phrase and the subject have gone out of fashion — but it’s still an important issue, and arguably now more than ever.

Now, what you learned back then was that the transmission mechanism worked largely through housing. Why? Because long-lived investments are very sensitive to interest rates, short-lived investments not so much. If a company is thinking about equipping its employees with smartphones that will be antiques in three years, the interest rate isn’t going to have much bearing on its decision; and a lot of business investment is like that, if not quite that extreme. But houses last a long time and don’t become obsolete (the same is true to some extent for business structures, but in a more limited form). So Fed policy, by moving interest rates, normally exerts its effect mainly through housing.

But Montier seems to have forgotten about housing, which is actually a fairly common problem among certain kinds of econocritics.

And do interest rates move housing? Here’s the inverse of the Fed funds rate versus housing starts during the period when major moves in monetary policy were mainly driven by concerns about inflation (as opposed to bursting bubbles):

Looks like a relationship to me. And I would say that for many economists of a certain age, the events of the early 1980s were especially important in convincing us that monetary policy can matter a lot. Paul Volcker decided to tighten; interest rates soared, housing collapsed, and the economy plunged into a deep recession. He decided that the economy had suffered enough, rates plunged, housing surged, and it was morning in America.

Beyond that, the general proposition that money matters also rests on a lot of careful empirical work — in fact, on two styles of careful work. There’s the Romer-Romer narrative approach, which examines Fed minutes to identify “episodes in which there were large monetary disturbances not caused by output fluctuations”, and the Sims approach, which uses time-series methods. Both find that monetary policy does indeed matter.

Are there times when monetary policy — or at least conventional monetary policy — can’t do the job? Of course. Summers and I have been talking about the zero lower bound since the 1990s — he introduced the argument that the ZLB justifies a positive inflation target, I brought liquidity-trap analysis out of the mists and back into modern economics.

The bottom line here is that there’s plenty of real stupidity in the world; we don’t need to add to the cloud of confusion with a critique of imaginary stupidity.

Yesterday there were three posts, the first of which was “Making Hay While the Sun Shines:”

Well, that’s the weather forecast, anyway, although this being England I have my doubts.

Anyway, I’ll be going to the Hay Festival this weekend, talking on a couple of panels Monday, and mainly soaking up whatever there is to soak up (which I hope doesn’t include rain.)

The second post yesterday was “Nobody Cares About the Deficit:”

Sitting here in the UK, where everyone continues to believe that budget deficits are the central issue despite overwhelming evidence to the contrary, it’s refreshing to look home once in a while and contemplate the utter collapse of the deficit-scold agenda.

One way to see this is to track the disappearance of Alan Simpsonfrom the radar; another is to look at polls that ask people to name important issues. For example, CNN/ORC has been asking consistent questions for several years; here’s the percentage of voters naming the budget deficit as the most important issue:

January 2013: 23 percent

May/June 2014: 15 percent

Sept. 2014: 8 percent

In the most recent CBS/NYTimes poll, which was open-ended, the deficit didn’t even make it onto the list.

And you know what? The public is right, and the Very Serious People were and are wrong.

The last post yesterday was “Tariffs Versus Currencies:”

While it’s not remotely in the same league as the execrable Daley op-ed, the CEA report in support of TPP is, as Josh Bivens notes, an odd document. It’s not wrong, or not mostly wrong — I don’t even share all of Bivens’s complaints. It’s just off-topic; at best, it’s a celebration of the results of all the trade liberalization that has taken place since the 1930s, and tells us nothing about policy when trade barriers are already very low, and “trade” agreements are actually about investment and intellectual property.

As I said, the report doesn’t make any clearly false claims — I do think Furman et al are too scrupulous for that. But there is some missing context. The very first bullet point declares, in bold type, that

U.S. businesses must overcome an average tariff hurdle of 6.8 percent, in addition to numerous non-tariff barriers (NTBs), to serve the roughly 95 percent of the world’s customers outside our borders.

You’re clearly meant to think of 6.8 as a big number. Is it?

Actually, no. There are various ways to think about that; one is to compare those tariffs with the kind of currency fluctuations that occur all the time. Here’s the recent history of the dollar:

That’s a 20 percent rise between the summer of last year and early 2015, partly given back recently. Since inflation is low everywhere, that’s more or less one-for-one a loss in competitiveness by US exporters, and far bigger than the tariff barriers.

Non-tariff barriers (NTBs) add to the wedge, of course. But even they are no big deal (NDB).


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