Krugman’s blog, 6/20 and 6/21/15

There were three posts on Saturday, and two yesterday.  The first post on Saturday was “Obamacare and Labor Supply:”

I was critical of CBO yesterday — probably excessively — for giving what seemed like undue cover for deficit scolds in its long-run budget projection. So credit where credit is due: the new report on the consequences of repealing the ACA is definitely not what the Congressional majority wants to hear. Despite including “dynamic scoring”, the report finds, unambiguously, that Obamacare reduces the deficit and repealing it would enlarge the deficit.

Is there anything in the report that provides fodder for the opponents? I see that the Times report says that there are “mixed effects”, because CBO says that GDP would be higher if the ACA were repealed. And maybe the usual suspects will try to spin it that way.

But the truth is that this report is much, much closer to what supporters of reform have said than it is to the scare stories of the critics — no death spirals, no job-killing, major gains in coverage at relatively low cost.

And there’s another important point: while the ACA may lead to somewhat lower GDP because it reduces labor supply, this does not imply a one-for-one loss in welfare. Suppose that a family’s second earner, now assured of being able to get health insurance, chooses as a result to work shorter hours and spend more time taking care of the children. GDP goes down — but there is a compensating non-monetary gain.

In fact, in a perfectly competitive economy the gain would fully offset the fall in GDP: if workers are paid their marginal product, the fall in GDP from the ACA is equal to the lost wages, but workers choosing to work less clearly prefer to have the extra time to the extra wages. Or to put it a bit differently, other things equal it’s agood thing if workers, freed from the fear that they won’t be able to get health insurance, respond by voluntarily working less.

OK, the story is made more complicated by taxes, which place a wedge between wages paid and income received; so there probably is a net cost to a fall in labor supply. But this effect is fully captured by the loss in revenue, which CBO doesn’t think would be large.

So overall this isn’t at all a “mixed” report — it’s a very big win for Obamacare supporters.

Saturday’s second post was “Voters Always Want a Strong Currency:”

Even as the prospect of Grexit moves from inconceivable to plausible, polls consistently show that Greek voters want to stay on the euro. But what does this tell us?

Not very much, I think — because I’m pretty sure that voters consistently want their currency to be strong. The advantages seem obvious, and there’s also an element of national pride; meanwhile, the difficulties created by an overvalued currency are obscure except to those directly engaged in exporting.

That’s an impressionistic view, but are there data? Well, searchingiPoll doesn’t turn up very much, but here’s an interesting result from 1985, when the U.S. dollar was very strong — so strong that the G5 famously met at the Plaza Hotel to agree on a plan to push it down:

So if Greek voters oppose the idea of a new drachma that would surely be weak against the euro, they are just echoing the preferences of voters always and everywhere.

Now, that consistent preference may itself matter, just as the eternal popularity of the household metaphor for fiscal policy — voters always favor a balanced budget — is one reason Keynesian economics is so hard to apply. But I don’t think there’s much news in Greek sentiment in favor of keeping the euro.

The last post on Saturday was “The Issue That Won’t Go Away:”

So another atrocity has us talking about race again. And rightly so. Nothing about America makes sense without understanding the long shadow cast by the original sin of slavery.

And yes, it’s an integral part of the left-right divide. Look at “Why Doesn’t the United States Have a European-Style Welfare State?” by Alberto Alesina — yes, that Alesina — Ed Glaeser, and Bruce Sacerdote. The authors are hardly big lefties; nonetheless, they were driven to the conclusion that it’s mainly about you-know-what:

Racial discord plays a critical role in determining beliefs about the poor. Since racial minorities are highly overrepresented among the poorest Americans, any income-based redistribution measures will redistribute disproportionately to these minorities. Opponents of redistribution in the United States have regularly used race-based rhetoric to resist left-wing policies. Across countries, racial fragmentation is a powerful predictor of redistribution. Within the United States, race is the single most important predictor of support for welfare. America’s troubled race relations are clearly a major reason for the absence of an American welfare state.

To see what they’re talking about, and why their point remains so relevant, look at two maps. First, the implementation of the Affordable Care Act:

Second, this:

The first post yesterday was “Avoiding Apocalypse:”

Larry Summers has written a scary column warning that Greece may be on the verge of becoming a “failed state”. It’s a useful corrective to the extraordinary complacency I’m hearing from too many European officials. But I do think it’s worth pointing out that this need not happen, even if there is no deal.

What Summers seems to portray is a scenario in which Greek banks collapse and take down the economy with them. But what if Greece abandons the euro and issues its own currency to keep cash flowing?

For sure there would be a sharp devaluation, which would lead to a spike in inflation. But would hyperinflation follow? Remember that Greece is running a large cyclically adjusted primary surplus — that is, given even a modest economic recovery it would not need to roll the printing presses to pay its bills. And a a devaluation would, other things equal, promote recovery.

I know that many people are telling stories about immediate collapse due to inability to buy raw materials, complete failure of exports to respond, and so on. They could be right. But I actually can’t think of any historical examples that fit this story — in particular, all the hyperinflations I know about involved governments too weak to collect taxes, and believe it or not, that’s not true of Greece despite all you’ve heard.

So even if Greece goes over the edge in the next few days, there may be another off-ramp from the road to hell. And at that point the European problem would turn on its axis, as Wolfgang Munchau says, and become one of coping with the euro’s evident reversibility.

Yesterday’s second post was “No Shaving Grace:”

Serious matters are afoot, but I don’t know if there’s anything more I can say about them right now. So, on to a subject where I think I can make a useful intervention: Peter Dorman’s query about why so many economists wear beards.

Actually, others have asked the same question — and found that bearded Nobelists are not quite as prevalent as one might have thought. Mostly, I think, it’s the impression conveyed by myself and Joe Stiglitz, although Simon Wren-Lewis has an even more impressive display.

But to the extent that there is a pattern here, it’s basically about the whiz-kid culture of economics, in which careers can take off very quickly — and one’s appearance may not have kept up with one’s professional reputation. I grew my beard when I was 26, and it was very definitely a defensive move: there I was, writing what I hoped were ground-breaking papers — everything everyone has said about international trade is wrong! — and looking like an undergraduate. (Seriously — when I went in to see a colleague some of the students complained that I was cutting ahead of the line). So I was looking for a bit of hairy gravitas.

And by the time I no longer needed that, the beard had become part of my persona.



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