Krugman’s blog, 7/4/15 and 7/5/15

There were three posts on Saturday, and four posts yesterday.  The first post on Saturday was “Back at My Desk (Personal):”

It wasn’t optimal to be taking a bike trip this past week, and I do feel a bit bad about having what you can see was lots of fun at a time of crisis. But I’m a kibitzer, not a player, and no purpose would have been served by calling it off. I’m now back, and normal blogging will resume.

Saturday’s second post was “Insurance and Reaganomics:”

For my sins, I’m debating Stephen Moore next week, so I’ve been doing some reading. And one assertion on Moore’s part actually sent me off to do some research. In an attack on Obamacare, he ridiculed the administration for taking credit for an expansion of Medicaid:

How is putting more people on Medicaid a triumph? Medicaid is a welfare program. If this were a well-functioning economy with good jobs, Medicaid rolls would be shrinking and Americans would be coming self sufficient.

Leave aside the question of whether supply-siders know anything at all about how to achieve prosperity; even when prosperity does come, or at least when they can claim it has come, how does this affect health insurance? Specifically, how did insurance rolls evolve during the reign of Saint Reagan?

The standard Census data don’t go back that far, but the CDC has made estimates for the population under 65. As you can see from the chart, Morning in America did nothing to boost insurance — in fact, the share of Americans with private coverage declined, and because Medicaid din’t grow the overall rate of uninsurance rose from 12 percent in 1980 to 15.6 percent in 1989.

In other words, nothing in the economic record — not even the record of the great conservative hero — suggests that you can grow your way into universal health coverage.

The last post on Saturday was “No, Puerto Rico Isn’t Greece:”

There are obvious parallels between the crisis in Puerto Rico and the disaster in Greece — a poor economy overshadowed by a huge wealthier economy to the north, budget problems, declarations that the debt is unpayable. And I don’t want to minimize the problems and pain in San Juan. But it’s important to understand that the depth of the pain is just not of the same order of magnitude, and not just because Puerto Rico’s banks are secured by a national safety net, although that helps.

I’ve been trying to produce some indicators using the Puerto Rico data, and they’re remarkably unlike Greece.

It’s true that Puerto Rico has achieved an impressive drop in real GNP (people usually use GNP for PR because so much of of GDP is profits accruing to offshore firms). But the drop per working age adult is less, because of large-scale emigration — which is actually supposed to happen when changing economic winds cause a U.S. region to lose competitive advantage. Unemployment is up, but “only” by 4 percentage points. And there doesn’t seem to have been anything comparable to Greece’s collapse in living standards. Greek real consumption per capita has plunged, whereas Puerto Rico’s has actually risen.


Eurostat

Government Development Bank for Puerto Rico

What’s supporting that consumption? Some of it surely involves private remittances from Puerto Ricans working on the mainland and sending money home. But it’s also fiscal federalism: as Puerto Rico’s economy has stumbled, its payments to Washington have dropped while its receipts from federal social insurance programs have risen, so that the island is in effect receiving aid on a scale that would be inconceivable in Europe.


Government Development Bank for Puerto Rico

Now, none of this guarantees against bad economic developments, all it does is soften the blow. And there is a downside to high labor mobility (suggesting, for the wonks, that Mundell had it wrong), namely the problem of an emigrating tax base while the recipients of government services stay put. But again, bad as it is, the Puerto Rico story isn’t remotely in Greece’s league.

Yesterday’s first post was “Stephanopoulizing:”

Forgot to mention — I’ll be on This Week, fairly late in the program, talking about the obvious.

The second post yesterday was “Meanwhile in China:”

Shanghai stock indexShanghai Stock Index Bloomberg

I am, of course, anxiously awaiting the results of Greferendum, although the next few days in Greece will be terrible whoever wins. But we shouldn’t lose sight of other risks facing the world. Some of us have been worrying quite a lot about China — an economy that at market exchange rates is 40 times the size of Greece, and isseverely unbalanced. And in the past month, mainly in the past few days, the Shanghai stock index has fallen almost 30 percent. This doesn’t necessarily mean that the feared crisis has come, but it’s definitely not a good sign.

Yesterday’s third post was “Austerity Arithmetic:”

The betting markets now believe that Greece will vote “no”, but nobody really knows even now. So let me take some time to do a calculation that I should have done a while ago. Here’s the question: Even if you ignore everything else, can austerity policies really improve the debt position of a country in Greece’s situation? If so, how long will that take?

Suppose, to be concrete, that we talk about permanently raising the primary surplus by one percent of GDP. As I’ve written before, and as Simon Wren-Lewis notes, given the lack of an independent monetary policy achieving a primary surplus requires a lot more than one-for-one austerity. In fact, a good guess is that you’d have to slash spending by 2 percent of GDP, because austerity shrinks the economy and reduces tax receipts. This in turn means that you’d shrink the economy by around 3 percent. So, a 3 percent hit to GDP to raise the primary surplus by 1.

But a smaller economy means that the debt/GDP ratio goes up initially. In fact, given Greece’s starting point, with debt at 170 percent of GDP, the adverse effects of austerity mean that trying to raise the primary surplus by 1 point quickly causes the debt-GDP ratio to rise by 5 points (.03*170). So this might suggest that it would take 5 years of austerity just to get the debt ratio back to where it would have been in the absence of austerity.

But wait, there’s more. Let’s bring Irving Fisher into the discussion. A weaker economy will mean lower inflation (or faster deflation), which also tends to raise the debt/GDP ratio. The chart shows a scatterplot of Greece’s output gap (as estimated by the IMF — a dubious measure, but stay with it) versus the rate of change of the GDP deflator.


IMF

Yes, it’s a crude Phillips curve, but it sort of works. And it suggests that a 1 point rise in the primary surplus, which requires austerity that causes a 3-point fall in real GDP, will reduce inflation by about 0.7 percentage points (3*0.23). And if you start with debt of 170 percent of GDP, this raises the debt ratio by more than a percentage point each year. That is, the attempt to reduce debt by slashing spending actually raises the ratio of debt to GDP, not just in the short run, but indefinitely.

OK, we can soften this result by bringing in the effect of falling Greek prices on exports, which should boost economic growth. I’m still working this one out, but at best it makes austerity successful at reducing the debt ratio in the very long run — think decades, not years. Austerity for a country in Greece’s position appears to be an unworkable solution even if debt is all you care about.

And just to be clear, I’m basically doing textbook macroeconomics here, nothing exotic. It’s the austerians who are inventing new economic doctrines on the fly to justify their policies, which appear to imply not temporary sacrifice but permanent failure.

The last post yesterday was “Europe Wins:”

Tsipras and Syriza have won big in the referendum, strengthening their hand for whatever comes next. But they’re not the only winners: I would argue that Europe, and the European idea, just won big — at least in the sense of dodging a bullet.

I know that’s not how most people see it. But think of it this way: we have just witnessed Greece stand up to a truly vile campaign of bullying and intimidation, an attempt to scare the Greek public, not just into accepting creditor demands, but into getting rid of their government. It was a shameful moment in modern European history, and would have set a truly ugly precedent if it had succeeded.

But it didn’t. You don’t have to love Syriza, or believe that they know what they’re doing — it’s not clear that they do, although the troika has been even worse — to believe that European institutions have just been saved from their own worst instincts. If Greece had been forced into line by financial fear mongering, Europe would have sinned in a way that would sully its reputation for generations. Instead, it’s something we can, perhaps, eventually regard as an aberration.

And if Greece ends up exiting the euro? There’s actually a pretty good case for Grexit now — and in any case, democracy matters more than any currency arrangement.

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2 Responses to “Krugman’s blog, 7/4/15 and 7/5/15”

  1. F. E. Says:

    I cannot imagine what sins Mr. Krugman could commit that would merit him being sentenced to debate that clown Stephen Moore. Again, Marion in Savannah, thank you for bringing these columns to us.

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