Krugman’s blog, 8/14/15

There were two posts yesterday.  The first was “The Downside of Labor Mobility:”

The theory of optimum currency areas is one of those old-fashioned pieces of macroeconomics — like IS-LM, the concept of the liquidity trap, and the theory of secular stagnation — that has turned out to be extremely relevant and useful to the world since 2008. So this is a version of Mark Thoma’s dictum that new economic thinking involves reading old books (or in this case articles). Still, we do learn some new things. And what we’ve learned lately, I’d argue, is that labor mobility — which was supposed to be good, and a prerequisite for currency union — is actually much more problematic than we knew.

In my somewhat stylized intellectual history, we owe OCA theory to three main players: Robert Mundell, Ron McKinnon, and Peter Kenen. All three assumed, realistically, that wages and prices are sticky, so that fixing your exchange rate or adopting a shared currency imposes costs in the form of making it harder to adjust to “asymmetric shocks” that depress your economy relative to trading partners. These costs must be set against the benefits of making business across borders easier and more certain. The question then becomes how the characteristics of an economy affect that tradeoff.

In Mundell’s original version the key question was labor mobility: if workers moved freely and rapidly from slumping to booming regions, asymmetric shocks became a much smaller problem. One of the arguments American euroskeptics used to make was that Europe was less suited to a single currency because it lacked America’s extremely high interstate mobility of labor.

McKinnon offered a different criterion — the share of tradables in output; basically that required relative price adjustments would be smaller in very open economies, and also that having more transactions would increase the benefits of a common currency.

Finally, Kenen argued that fiscal integration or the lack thereof was crucial, that it mattered a great deal whether depressed regions would be cushioned by paying less in taxes and receiving more in benefits from the core.

So what have we learned? I’d say that we’ve learned that Kenen trumps Mundell — that in the absence of effective fiscal integration, labor mobility makes a currency union worse, not better.

I’ve said this before, but it seems worth emphasizing again in the light of this FT report on Portugal’s “perfect demographic storm.” The debt crisis in Portugal, it turns out, looks alarmingly like the trigger for an economic death spiral: a depressed economy is leading to large-scale emigration of working age Portuguese (also lower fertility, although this will take longer to matter), undermining the tax base, making an exit from crisis even harder. It’s not easy to see how this ends before you’re left with a rump nation of old people with no resources to care for them.

Regional economies in the US are less vulnerable to this sort of thing, although our imperfect fiscal integration means that it can still happen to some degree: Puerto Rico is also in a sort of death spiral of emigration and fiscal stress, but the degree of hardship is much less thanks to the national safety net.

But the point is that the Single European Act, which was among other things supposed to prepare the ground for a shared currency, may actually have interacted with the failure to integrate fiscal matters in such a way as to create a whole new kind of catastrophe.

Your cheery euro-thought of the day.

Yesterday’s second post was “R.E.S.P.E.C.T.:”

This is a blog post about fanatical centrists, British debt history, and ponies.

Start with the fanatical centrists: Martin Longman flies into a well-justified rage over a “centrist” column that concedes that the Iran deal is something we really need to do, effectively concedes that the arguments of the deal’s opponents are scurrilous and irresponsible — but condemns Obama for being “dismissive” of the opponents’ arguments.

That’s something that happens to me all the time. I constantly get mail — and sometimes other peoples’ columns — condemning me, not for being wrong, but for being dismissive of the arguments of those I criticize. After all, these are important people, so they deserve to be treated with respect. Right?


If people consistently make logically incoherent, ignorant arguments, the duty of a commentator is to say just that — not to mislead readers by pretending that they’re actually serious and making sense. You shouldn’t make gratuitous insults — I have never, to my knowledge, declared that someone’s mother was a hamster and his father smelt of elderberries. But stupid/ignorant is as stupid/ignorant does, and influence changes nothing.

Where I’ve been getting pushback lately is in my pronouncements that the whole Republican field is talking nonsense on economic policy. That’s a terrible thing to say, I’m told. But what if it’s true? And of course it is.

Consider a couple of recent entries. Jeb Bush, the supposedly sensible candidate, has been pushing the utterly ludicrous claim that he can deliver 4 percent growth; so now Mike Huckabee is trying to one-up the debate by promising 6 percent. Well, I can beat any of them — whatever they’re promising, I promise the same, and a pony.

Meanwhile, Rand Paul is decrying the irresponsibility of U.S. fiscal management; why, we haven’t been debt-free since 1835. Clearly, disaster looms, and has been looming for 180 years. But that’s nothing: Britain hasn’t been debt-free since at least 1692:

More than three centuries, spanning the Industrial Revolution and much more, of crippling irresponsibility. Just you wait!

Should Rand and Jeb! and Huckabee be treated with respect here? Are they outliers, and in that case which GOP contenders do deserve respect?

I know that it’s disturbing to read columns that portray the entire field as a bunch of cranks. But it would be a dereliction of duty, basically an act of dishonest reporting, to pretend that they aren’t. I’m all for respect here — but the people who deserve respect, in the form of honest assessment, are my readers.

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One Response to “Krugman’s blog, 8/14/15”

  1. Speech, Speech Says:

    Can u have shared tradeables which do not destabilize the OCR when the weighted production is unequivocally imbalanced. Do not assume that the labor will move post haste to the region or industry where there is the greatest need (success). Perhaps if the region of Europe were stable and not adding consumers and political differences it would manifest the objective in ameliorating the distinguishing characteristics of the labor market. Perhaps u could elucidate how the rust bowl invited Toyota to Tennessee and the break up of unions adjusted labor incentives. But is not the principle public concern in Europe the entirely uneven playing field inhabited by Germany to such a large extent it doesn’t need to bomb Poland?

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