Krugman’s blog, 10/28/15

There were two posts yesterday.  The first was “Climate Villains:”

Two stories you should read in tandem.

First, it’s now very clear that Exxon has been spending millions of dollars to prevent public action against a slow-motion catastrophe it itself was well aware was on its way. The company’s own researchpointed to global warming as a serious problem almost 40 years ago — but it has gone all out to confuse the issue, basically trying to get itself another few decades of profits at humanity’s expense. The cynicism is remarkable.

Meanwhile, David Roberts has a piece pointing out the McCarthyite tactics the House science committee has been using to persecute and intimidate scientists, especially but not only those working on climate.

If we fail to grapple with climate change in time to avoid catastrophe — which seems ever more likely — it won’t be because we didn’t have the knowledge to realize the problem, or the tools to fix it. It will because of cynicism and greed that, given the stakes, rise to the level of evil.

Yesterday’s second post was “Check Out Our Low, Low (Natural) Rates:”

Via Mark Thoma — whom everyone interested in today’s economic debates should check out daily — Thomas Laubach and John C. Williams of the Fed have a new paper updating their estimates of the natural real rate of interest. For those new to the term, the natural rate is a standard economic concept dating back a century; it’s the rate of interest at which the economy is neither depressed and deflating nor overheated and inflating. And it’s therefore the rate monetary policy is supposed to achieve.

Laubach and Williams find that the natural rate has plunged in recent years, and is now very, very low. The particular statistical method they use is reasonable, but in any case — as they document — the result pops out for pretty much any plausible methodology. Basically, we’ve had multiple years of very low rates, with no hint of a runaway boom or an inflationary takeoff, so any reasonable estimate is going to say that these low, low rates are close to (and maybe above) the natural rate.

L-W attribute the decline in the natural rate largely to the slowing of potential output, which in turn reflects demography and what looks like a slowdown in technological progress. That’s more speculative. But the low natural rate is as solid a result as anything in real time can be.

This in turn tells you several things. It says that all the complaints that the Fed is artificially keeping rates low are nonsense; rates are low because that’s what the real economy wants, and the Fed’s only alternative would be to create a depression.

It also casts even more doubt on the wisdom of the Fed’s urge to raise rates. Nothing in the economic situation suggests that rates are too low right now. And don’t tell us that we need to start “normalizing”: all indications are that “normal” has changed a lot since 2008, and trying to set interest rates as if the old normal were still valid is a recipe for very bad outcomes.

Finally, if the natural real rate is zero or less, a 2 percent inflation target gives very little room for interest rate cuts to fight recessions. The case for raising the target — which means not raising rates if and when inflation finally creeps up to 2 percent — just keeps getting stronger.

In any case, the message about what the Fed should do now is clear: nothing.



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