Krugman’s blog, 7/31, 8/1 and 8/2/15

There were two posts on 7/31.  The first was “Wall Street Now Hates Democrats:”

Contributions by financial industry
Contributions by Financial Industry (

Over at Vox, Jonathan Allen notes that Hillary Clinton, sometimes derided on the left as doing Wall Street’s bidding, is actually getting a lot less Wall Street money than people think. Allen notes that during her husband’s administration Clinton was known for her relative antipathy toward financial types, which may be part of the story. But you should also put this in the context of finance’s hard turn against Democrats in general. In 2004, facing an election whose outcome was uncertain, finance and insurance split its donations almost equally between the parties; in 2012 it gave well over twice as much to Republicans as to Democrats.

The reason is, of course, financial reform. Anyone who tells you that reform was meaningless and that there’s no difference between the parties should follow the money, which thinks that there is a big difference indeed.

The second post on 7/31/15 was “Industrial Cities of Yore:”

Nicholas Crafts and Alex Klein have a nice piece that tries to measure gains from geographic specialization in the late 19th and early 20th centuries. Indeed, it was a great age of industrial localization, so much so that the Twelfth Census (1900) included amonograph on the subject that is still a great source for students of economic history. Not only did it identify and quantify the degree of localization in many industries, but it offered quick origin stories for the main clusters. Thus, here’s what it had to say about detached collars and cuffs, almost totally centered in Troy, New York:

It’s hard to find clear-cut industrial clusters like this in modern America, and it’s interesting to ask why. But they are very much a feature of modern China with its button cities and toothbrush towns.

Crafts and Klein argue that this sort of specialization was a major factor in US economic growth. I’ll reserve judgment until I’ve had more time to read and think, but I definitely do love this stuff.

There was one post on 8/1/15, “Inflation Paranoia as a Tribal Marker:”

Derp — views that just keep being repeated in the face of overwhelming contrary evidence — has always been with us, but the derp quotient has really soared since the crisis of 2008, which made nonsense of doctrines too dearly held to be reconsidered. This is especially true of inflation derp: has any prominent figure who warned of runaway inflation from the Fed’s efforts admitted having learned anything from being wrong year after year?

It seems increasingly clear to me that what we’re looking at here has nothing to do with intellectual discourse as we normally understand it. It is, instead, about tribal identities: there’s a certain kind of person who rails against policies that debase the dollar, and that kind of person admires others who do the same no matter how wrong their predictions and disastrous their financial advice. As I said in a brief note on Ron Paul, it’s a form of Madoff-style affinity fraud, even if the perpetrator of the scam believes his own derp.

As you might guess, I’ve received some mail from Ron Paul admirers deeply angered by the suggestion that they are not engaged in deep intellectual argument. By and large the mail reads like this:

Dear shmak, Paul Krugman!
Stop insulting Ron Paul!
You are low level Socialist/Liberal who should be jailed for Life
your insulting writing style.
Ron Paul is Real Man with Capital M
and you are nobody!

But the thing is, it’s not just the libertarians who do this sort of thing. Awesomely, Richard Fisher, now retiring as president of the Dallas Fed, is apparently regarded as an intellectual giant — he “rose to the status of being a deity in Texas” — despite a track record of being wrong again and again.

A brief aside: the WSJ engages in a fairly common practice when describing inflationistas, namely that of whitewashing what they have actually spent year after year warning against. No, Fisher didn’t warn against “frothy financial markets”. He warned against inflation — inflation that kept not happening.

Why all the respect for what would ordinarily be considered a record of repeated bad judgment coupled with a lamentable unwillingness to learn from experience? The answer, surely, is that within the conservative tribe issuing dire warnings against inflation is considered virtuous whether or not they are right; it’s a way of showing that you’re their kind of guy, that you belong to the tribe.

Of course, saying things like that means that I should be jailed for life.

There were two posts on 8/2/15, the first of which was “Freshwater’s Wrong Turn (Wonkish):”

Paul Romer has been writing a series of posts on the problem he calls “mathiness”, in which economists write down fairly hard-to-understand mathematical models accompanied by verbal claims that don’t actually match what’s going on in the math. Most recently, he has been recounting the pushback he’s getting fromfreshwater macro types, who seem him as allying himself with evil people like me — whereas he sees them as having turned away from science toward a legalistic, adversarial form of pleading.

You can guess where I stand on this. But in his latest, he notes some of the freshwater types appealing to their glorious past, claiming that Robert Lucas in particular has a record of intellectual transparency that should insulate him from criticism now. PR replies that Lucas once was like that, but no longer, and asks what happened.

Well, I’m pretty sure I know the answer.

First of all, it’s true about the initial transparency. In the beginning, Lucas and disciples had a very clear statement of both the problem and their solution. They took it as an observed fact that fluctuations in nominal demand were associated with fluctuations in real output, as opposed to merely affecting the price level, which shouldn’t happen if prices were flexible. But they insisted that it was illegitimate to assume sticky prices and wages, that any story you tell must be grounded in microfoundations — and not just that, in maximizing behavior.

So Lucas came up with a story: it was all about imperfect information. Faced with a shock to nominal demand, producers couldn’t tell how much was just a money fluctuation and how much a real change in demand for their particular product, to which they should respond by changing output. So they would engage in signal extraction, making the best possible estimate; this would lead in aggregate to an upward-sloping aggregate supply curve, but only because of rational confusion. And this in turn had strong policy implications: you might see a relationship between money and output, but it would disappear if you tried to use it.

It was a lovely, intellectually interesting and exciting approach. It was also quite wrong.

The wrongness took a few years to become irrefutable. By the early 1980s, however, it was overwhelmingly clear that rational confusion couldn’t explain business cycles, either empirically or theoretically — business cycles last too long, rational agents should be able to tell real from nominal shocks using information like asset prices, and more. And so you had a substantial chunk of the profession going back to sticky-price models, arguing that under imperfect competition things like menu costs or slight deviations from perfect rationality were enough to make money very non-neutral in the short run.

But Lucas and his school couldn’t do that, because they had burned their bridges. They had seized the moment when people took their models seriously to loudly and aggressively declare that Keynesianism of any form was total nonsense, that everything macroeconomists had done in the previous four decades was worthless. it would have taken a lot of intellectual integrity to admit that they might have been premature, that their models weren’t working and that maybe there was something in that Keynesian stuff after all. And that kind of integrity did not manifest itself.

Instead they went even further down the equilibrium rabbit hole, notably with real business cycle theory. And here is where the kind of willful obscurantism Romer is after became the norm. I wrote last year about the remarkable failure of RBC theorists ever to offer an intuitive explanation of how their models work, which I at least hinted was willful:

But the RBC theorists never seem to go there; it’s right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don’t realize (or at any rate don’t admit to themselves) how fundamentally silly the whole thing sounds, how much it’s at odds with lived experience.

What Romer is telling us, based on his discussion of growth models, is that this kind of thing is pervasive in that school. And no, everyone doesn’t do it. Read Mike Woodford or Gauti Eggertsson or Ken Rogoff when he’s doing theory: they all take pains to provide an intuition behind their models, and they don’t engage in false advertising.

So what happened to freshwater, I’d argue, is that a movement that started by doing interesting work was corrupted by its early hubris; the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems, and sent them off on the path Paul now finds so troubling.

The second post on 8/2/15 was “Piketty’s “New” Book:”

Harvard University Press has released what looks like a new book by Thomas Piketty, but isn’t. My unhappy review.


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