Krugman’s blog 5/26 and 5/27

There were two posts on 5/26 and one yesterday.  The first post on 5/26 was “The IMF’s New Cloves:”

A brief further note on the European situation: to me, at least, there are some echoes of 1998. Back then the IMF, in its attempt to deal with the Asian financial crisis, focused — as it does now in Europe — on the supposed need to couple financial deals with structural reform. In the case of Asian debtors, this meant taking on crony capitalism — and God knows crony capitalism was very real.

Yet even then, and even more in retrospect, the attempt to fix everything raised questions about what, exactly, the Fund thought it was doing. (Joke about Camdessus among US Treasury people at the time: “Even Napoleon never got as far as Korea”.) Wasn’t the Fund going too far afield? The case that exemplified the problem, at least as I was told the story, was the assault on the Suharto family’sclove monopoly — certainly a bad thing, deserving to be killed, but not all that relevant to financial stability. And by making things like ending the clove monopoly a condition of stabilization loans, the IMF arguably helped delay a resolution and feed a self-fulfilling panic.

The parallel with Greece today is far from perfect, but there’s enough commonality that everyone should think hard about whether old mistakes are being repeated. Reform overreach, the attempt to link crisis resolution to some kind of universal fix, is a good way to turn a manageable crisis into an irreversible rupture.

The second post on 5/26 was “Things I Wish I’d Been Wrong About:”

Brad DeLong remembers a blog post of mine from 2009 about the non-threat of an interest rate spike; I have to say that it looks pretty darn good analytically after all these years. Unfortunately, it was also right about this:

I just don’t think the inner circle gets how much danger we’re in from another vicious circle, one that’s real, not hypothetical. The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

Yesterday’s post was “Preliminary Notes on Inequality and Urbanism:”

Edited slightly from first version

Tim Wu has an interesting piece about the phenomenon of vacant storefronts in booming New York neighborhoods, which by coincidence dovetails with a number of conversations I’ve been having here at the Said Business School in Oxford, where several people are interested in the changing economic geography of London and its links to globalization.

The empty-store phenomenon is interesting, and cries out for a bit of modeling, which I won’t do right now. But it’s part of a broader story of big money moving in to desirable neighborhoods, and in the process destroying what makes them desirable. And this in turn has me thinking, blurrily — this is just a start — about the relationship between inequality and urbanism. Not as a diatribe — I think it’s a fairly complex issue — but just as an interesting thing, especially if you’re in the process of moving into a big city.

Some thoughts:

First, when it comes to things that make urban life better or worse, there is absolutely no reason to have faith in the invisible hand of the market. External economies are everywhere in an urban environment. After all, external economies — the perceived payoff to being near other people engaged in activities that generate positive spillovers — is the reason cities exist in the first place. And this in turn means that market values can very easily produce destructive incentives. When, say, a bank branch takes over the space formerly occupied by a beloved neighborhood shop, everyone may be maximizing returns, yet the disappearance of that shop may lead to a decline in foot traffic, contribute to the exodus of a few families and their replacement by young bankers who are never home, and so on in a way that reduces the whole neighborhood’s attractiveness.

On the other hand, however, an influx of well-paid yuppies can help support the essential infrastructure of hipster coffee shops (you can never have too many hipster coffee shops), ethnic restaurants, and dry cleaners, and help make the neighborhood better for everyone.

What does history tell us? Politically, I’d like to say that inequality is bad for urbanism. That’s far from obvious, however. Jane Jacobs wrote The Death and Life of Great American Cities right in the middle of the great postwar expansion, an era of widely shared economic growth, relatively equal income distribution, empowered labor — and collapsing urban life, as white families fled the cities and a combination of highway building and urban renewal destroyed many neighborhoods.

And when a partial urban revival began, it was arguably associated with forces driven by or associated with rising inequality. Affluent types in search of a bit of cool — probably 5 percenters rather than 1 percenters, and more or less David Brooks’s Bobos (bourgeois bohemians) drove gentrification and revival in urban cores; in New York, at least, large number of poorly paid but striving immigrants drove the revival of outer borough neighborhoods like Jackson Heights or Brighton Beach.

Still, we’re now arguably looking at something new, as the really wealthy — domestic malefactors of great wealth, but also oligarchs, princelings, and sheiks — buy up prime real estate and leave it vacant, creating luxury-shopping wastelands at best (I know, snobbish Upper West Side bias), expensive ghost districts at worst.

Anyway, interesting to think about, and for me a welcome diversion from dark thoughts about Greece.



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