Krugman’s blog, 5/29, 5/30 and 5/31/15

There were two posts on 5/29, two on 5/30, and one on 5/31.  Here’s the first from 5/29, “Sex and Drugs and Zero Rates:”

Bloomberg has a clever chart, showing just how many traders have never seen an economy not at the zero lower bound:

This cries out, of course, for a callback to my favorite blog comment ever, on Kevin O’Rourke’s What Do Markets Want? Saith the commenter,

The markets want money for cocaine and prostitutes. I am deadly serious.

Most people don’t realize that “the markets” are in reality 22-27 year old business school graduates, furiously concocting chaotic trading strategies on excel sheets and reporting to bosses perhaps 5 years senior to them. In addition, they generally possess the mentality and probably intelligence of junior cycle secondary school students. Without knowledge of these basic facts, nothing about the markets makes any sense—and with knowledge, everything does.

Side benefit: read the caption on the Bloomberg chart, and note how bad economic analysis — the specific kind of bad analysis one finds on cable TV business news — gets presented, probably unknowingly, not even as opinion but as fact. “Inexperienced traders will have to tackle markets without the central bank’sartificially low interest rates …” [my emphasis]. Who says they’re artificially low? What does that even mean? It might mean rates below the Wicksellian natural rate, which is the rate that produces stable inflation — but with inflation consistently below the Fed’s target, this criterion would if anything say that rates are artificially high, propped up by the zero lower bound.

Anyway, this is an issue that has been hashed over many times, most recently by Ben Bernanke, saying pretty much exactly the same thing I said a year earlier. But someone at Bloomberg thinks it’s just a well-known fact that rates are artificially low, and so misinforms readers.

The second post on 5/29 was “Northern Discomfort:”

The FT has an interesting although garbled story about Finland’s economic woes. Ignore the numbers, which as best I can tell are all wrong (is this becoming an FT trademark?); more crucially, someone seems confused about the difference between wages and unit labor costs. If you go to the Conference Board numbers, you find that Finland has indeed seen a rapid rise in ULC, but not because of a wage explosion; it’s all about collapsing manufacturing productivity.

But the broader story here is that we’re increasingly seeing that the problems of the euro extend well beyond the troubles of southern European debtors. Economic performance has also been very bad in several northern nations with good credit ratings and low borrowing costs — Finland, Denmark (which isn’t on the euro but shadows it), the Netherlands.

What’s going on? Well, in the case of Finland we’re seeing the classic problems of asymmetric shocks in a currency area that isn’t optimal. Finland’s two main export sectors, forest products and Nokia, have tanked; this creates the need for a sharp fall in relative wages to make up for the lost markets, but because Finland doesn’t have its own currency anymore this adjustment must take the form of a slow, grinding internal devaluation (which is, by the way, why the garbled discussion of wages turns the story into nonsense).

The problems of the euro, in other words, weren’t caused by an outbreak of fiscal irresponsibility that won’t recur if the Greeks can be brought to heel; they weren’t even, in a deep sense, the result of big capital flows that won’t come back again. The whole single currency project was flawed from the start, and will keep generating new crises even if Europe somehow gets through this one.

Saturday’s first post was “The Real America:”

Younger and/or foreign readers may not recall how big a role the alleged moral superiority of small-town America used to play in conservative politics (and still does, to some extent). Republicans portrayed themselves as the party of the “real America”, of family values, as opposed to the decadent left in its enclaves on the coasts. Defense of traditional values played a big role in the 2004 campaign.

You always knew that there was plenty of hypocrisy here, that the heartland had no monopoly on virtue and the coast no monopoly on vice, and that surely some of the loudest family-value types had skeletons in their closets. But what we’re now learning about theSpeaker of the House during those years is beyond anything one could have imagined.

And let’s not forget the family values of the Duggar family…  The second post on Saturday was “Last Exit Before Chaos:”

There’s an odd summer-of-1914 feel to the current state of the Greek crisis. While some of the main players are, rightly, desperate to find a way to head off Grexit and all it entails, others – on the creditor as well as the debtor side — seem not just resigned to collapse but almost as if they’re welcoming the prospect, the way, a century ago, far too many Europeans actually seemed to welcome the end of messy, frustrating diplomacy and the coming of open war.

Is there still a way out? There should be. As I and others have beensaying for a while, the arithmetic is actually quite clear: Greece cannot run a primary deficit, it cannot be forced to run a large primary surplus, so a small primary surplus is the obvious solution and better for all concerned than euro exit.

There is, one must admit, a new problem caused by the current confrontation itself: uncertainty has pushed Greece back into recession, and the primary surplus achieved last year has vanished. But given a deal it should be possible to arrange some temporary financing while a modest recovery puts the primary balance back into the black.

The big problem is how to get a deal given lack of trust on all sides. The Greeks feel, with justification, that they have been treated as a conquered province by callous and incompetent proconsuls, and balk at anything that seems like a return to the regime of the past 5 years. The institutions – looking over their shoulders at the Swabian housewife – don’t trust that the still-inexperienced Syriza government knows what it is doing, has the capacity to deliver, or is realistic about what has to be done.

Yet from what I hear there is still room for at least a temporary deal. Greece would have to deliver some concrete action – VAT hike, some adjustment on the pensions (but not a complete reform right now), maybe something on product markets. Enough so that Merkel and others can say that Greece is acting, but framed in such a way that Tsipras can say to his backers that he is not surrendering like his predecessors. Given something along these lines, the people who have been raising the bar could probably be forced to lower it again to something feasible. That is, it should be possible to get everyone to stand down.

There are just a few days left. Let’s hope that cool heads prevail.

Yesterday’s post was “This Age of Derp, Kansas Edition:”

Menzie Chinn notes the continuing failure of the Kansas experiment with supply-side tax cuts. And yes, it is an experiment — Gov. Brownback said it was, and by cutting taxes radically on the basis of ideology rather than any compelling event, Kansas in effect provided us with a natural experiment on exactly what such cuts accomplish. Menzie uses business indicators; I just look at employment growth since Brownback took office, compared with the nation as a whole (red line). No hint whatsoever of a supply-side boost, and of course a terrible fiscal crisis.

So how will this change GOP economic ideology? You know the answer: not at all. We live in an age of right-wing derp, of doctrines that just get repeated (and indeed strengthen their political hold) no matter how wrong they prove. Gold bugs and Austrians are more dominant in GOP circles than they were before seven years of wrongly predicting runaway inflation. Supply-siders are more dominant than ever despite the boom in California and the bust in Kansas.

Why this indifference to evidence? Partly it must be the closed right-wing media universe. Partly it’s political polarization, which means that in places like Kansas even the most spectacular policy failure doesn’t cost Republicans elections, whereas any hint of heresy will cost you the primary.

Anyway, it’s a remarkable picture.

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