Krugman’s blog, 7/6/15

There were five posts yesterday.  The first was “The Scale of Things (Personal and Trivial):”

On Friday I drove from Vermont to New York, but as usual avoided driving into Manhattan — I parked at Secaucus Junction, a quick train ride in and a good jumping-off point for the drive to Princeton today.

And as I headed south from Secaucus, I had one of those moments when the sheer scale of the world economy hit me.

The vista: in front of me the NJ Turnpike, 12 lanes wide at this point and already full of trucks early in the morning. On the right, Newark Airport, with many planes taking off and landing. On the left, the massive cranes of the Elizabeth container port marching off into the distance.

And Newark is only one of three New York airports; New York is, these days, only one of many huge global metropolitan centers. The scale of the whole thing is more or less literally inconceivable, in the sense that nobody can picture the reality of our getting and spending.

Maybe the reason this kind of thing hits me now and then is that in my normal line of work I analyze this gigantic system using stylized little models that reduce all this vastness to a couple of intersecting lines. And that’s OK — people who reject stylized models invariably end up relying, whether they know it or not, on implicit models that are even less realistic because their assumptions go unexamined. Furthermore, those stylized little models have been hugely successful in recent years, predicting the quiescence of inflation and interest rates, the adverse effects of austerity, and more.

But every once in a while it does seem worthwhile to contemplate the enormity of the system we’re talking about.

Kinda makes TMOW and his flat earth seem silly…  Yesterday’s second post was “Scattered Notes on the Euro:”

Wolfgang Munchau has a perceptive analysis of the utter disaster of the Yes campaign in Greece, in which he says

What I found most galling was the argument that Grexit would bring about an economic catastrophe, as though the catastrophe had not already happened. If you have been unemployed for five years, with no prospect of a job, it makes no difference whether the money you do not get is denominated in euros, or in drachma.

Wish I’d written that. But now what?

It’s becoming hard to see any path that doesn’t lead to Grexit; it is also, although this is still something few want to accept, becoming increasingly obvious that Grexit is Greece’s best hope. Otherwise, where is recovery ever supposed to come from? Even with massive debt relief, Greece will be forced to run huge structural primary surpluses — that is, pursue tax and spending policies that would produce huge surpluses if the economy were anywhere near full employment — and in so doing keep its economy depressed for the foreseeable future.

Or to put it a bit differently, what would be a straightforward policy problem if Greece had its own currency becomes an almost insoluble mess because it doesn’t. At some point the argument that the costs of a transition are too high wears thin.

Now, I get interesting mail when I say things like this — much of it along the lines of “I can’t believe that a far-left-wing type like you got a Nobel”. Because a lot of people seem to believe that real economists believe in sound money, preferably gold, and that only socialists believe that there can ever be any advantages to currency depreciation.

Socialists, that is, like Milton Friedman. But of course modern conservatives get their monetary economics from Ayn Rand, not the Chicago School.

Anyway, this isn’t anywhere close to over.

The third post yesterday was “Delusions of Control:”

David Keohane has an informative post on the China stock crash, which is among other things revealing that the Chinese government has much less ability to control events than legend has it. And that brings back memories.

You see, when the Japanese bubble of the 1980s began deflating, there were many people insisting that the Ministry of Finance had it all under control. In fact, years into the Lost Decade you would still read articles and books claiming that Japan knew exactly what it was doing, even that it was all a cunning plot to lull the West into complacency while Japan took over the world economy.

The general point is that if you believe that officials have the economy — any economy — under control, you’re setting yourself up for a big disappointment. And in particular, it’s invariably a very bad idea to assume that officials know things that outside economists don’t. When it comes to economic policy, everyone has pretty much the same information, and holding public office, whatever its other benefits, does not improve one’s analytical skills.

Those of us who have been warning about big trouble in big China might be wrong. But we won’t be wrong because Chinese officials possess secret information or secret levers of control.

The penultimate post yesterday was “Lone Star Bailout:”

Jared Bernstein weighs in on the big No, hopes that it leads to a change in Europe’s approach, but acknowledges the political difficulties:

To be fair, it’s not that simple. There are structural political factors in play, endemic to the fact that the currency union is not a political union, nor a fiscal union, nor a banking union. As one German economist put it to me, “How do you think the people of Manhattan would like bailing out Texas?” Fair point, and a non-trivial challenge, for sure.

Ahem. As it happens, the people of Manhattan did bail out Texas, big time. I wrote about it here. The savings and loan crisis, which was very costly to taxpayers, was mainly a Texas affair:

The cleanup from that crisis cost taxpayers about $125 billion (pdf), back when that was real money. As best I can tell, around 60 percent of the losses were in Texas (pdf). So that’s around $75 billion in aid — not loans, outright transfer.

Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.

But of course Manhattan was never asked to bail out Texas; we had a national system of deposit insurance, and the big Lone Star bailout was automatic.

The last post yesterday was “Grapes of Wrath:”

OK, is Eric Asimov doing international finance now (and scooping the rest of us, too)? His wine of the month is from the Greek island of Santorini, which is the remnant of a bigger island destroyed by a huge volcanic explosion. This explosion seems to have played a central role in the collapse of Minoan civilization, and may have given rise to the legend of Atlantis.

Eric, are you telling us something?

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One Response to “Krugman’s blog, 7/6/15”

  1. Total Solutions,INC Says:

    Instead of Greece being the subject of a cavity search by Merkel and Company would not the underlying problem facing Greece, namely a lack of production be better served by a LBO?

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