Krugman’s blog, 11/21 and 11/22/15

There was one post on Saturday, and two yesterday.  Saturday’s post was “Are Banks Europe’s Problem?”:

For those of us who worried a lot about Japan in the late 1990s and now find the whole advanced world facing similar problems, deja vu comes so often that we get deja vu about getting deja vu. A case in point is the rise and fall of European bank-blaming — that is, the argument that the weakness of banks is what’s holding European recovery back.

At FtAlphaville, Matthew Klein looks at the evidence, and is surprised to find that there’s little support for the bad-banks-did-it story, even though everyone repeats it. But look back at my 1998 BPEA on Japan, which is more or less where I came in. Back then it was almost universally insisted that the failure of monetary base expansion to filter through into bank lending showed that a dysfunctional banking system was the core of Japan’s problem. But I argued (154-158) that the nonresponse of monetary aggregates was exactly what you should expect in a liquidity trap, and that there was little evidence (174-177) that banking problems were actually central to the economy’s weakness.

So, deja vu all over again, all over again.

Yesterday’s first post was “Thinking About the Trumpthinkable:”

I'm not a political scientist, man
I’m not a political scientist, man

Alan Abramowitz reads the latest WaPo poll and emails:

Read these results and tell me how Trump doesn’t win the Republican nomination? I’ve been very skeptical about this all along, but I’m starting to change my mind. I think there’s at least a pretty decent chance that Trump will be the nominee.

Here’s why I think Trump could very well end up as the nominee:

1. He’s way ahead of every other candidate now and has been in the lead or tied for the lead for a long time.

2. The only one even giving him any competition right now is Carson who is even less plausible and whose support is heavily concentrated among one (large) segment of the base—evangelicals.

3. Rubio, the great establishment hope now, is deep in third place, barely in double digits and nowhere close to Trump or Carson.

4. By far the most important thing GOP voters are looking for in a candidate is someone to “bring needed change to Washington.”

5. He is favored on almost every major issue by Republican voters including immigration and terrorism by wide margins. The current terrorism scare only helps him with Republicans. They want someone who will “bomb the shit” out of the Muslim terrorists.

6. There is clearly strong support among Republicans for deporting 11 million illegal immigrants. They don’t provide party breakdown here, but support for this is at about 40 percent among all voters so it’s got to be a lot higher than that, maybe 60 percent, among Republicans.

7. If none of the totally crazy things he’s said up until now have hurt him among Republican voters, why would any crazy things he says in the next few months hurt him?

8. He’s very strong in several of the early states right now including NH, NV and SC. And he could do very well on “Super Tuesday” with all those southern states voting. I can’t see anyone but Trump or Carson winning in Georgia right now, for example, most likely Trump.

9. And as for the idea of the GOP establishment ganging up on him and/or uniting behind another candidate like Rubio, that’s at least as likely to backfire as to work. And even if it works, what’s to stop Trump from then running as an independent?

Indeed. You have a party whose domestic policy agenda consists of shouting “death panels!”, whose foreign policy agenda consists of shouting “Benghazi!”, and which now expects its base to realize that Trump isn’t serious. Or to put it a bit differently, the definition of a GOP establishment candidate these days is someone who is in on the con, and knows that his colleagues have been talking nonsense. Primary voters are expected to respect that?

Yesterday’s second post was “VSPs and the Case of the Disappearing BPEA:”

Brad Delong has nice things to say about my old Brookings Papers on Economic Activity on the liquidity trap, and asks why central bankers still don’t seem to get some of the basic points I made way back then, especially about the desirability of a higher inflation target. I actually have a few thoughts, which are inevitably mostly — but not entirely! — self-serving.

First, most trivially but possibly significant, I suspect that fewer macroeconomists have actually read that paper than you might think. I still run into people who believe that the modern liquidity-trap literature started with Eggertsson and Woodford, which was written several years later, and that my piece must have been a commentary on theirs (which was very good!) And it’s been very clear that remarkably few people read what I had to say aboutfinancial intermediaries and monetary aggregates, even though that has turned out, I’d argue, to be a really important insight.

This comes, I think, from the kind of micro-tribalism that is surprisingly powerful in academic economics: I have never been part of the domestic-economy macroeconomic regular circuit, so some of them couldn’t believe that I could have something new to tell them (or were simply unaware that the paper even existed.)

After all, in the early stages of the crisis response you encountered lots of macroeconomists asserting that “nobody” had discussed fiscal policy in recent years, even though Obstfeld and Rogoff had done plenty in their big 1996 book; the point is that Obstfeld and Rogoff were in the international macro circuit, and domestic guys weren’t listening.

Oh, and by the time some of them may have gotten a clue that I wrote something they maybe should read, I was politically controversial, which shouldn’t matter but does. In effect, some people may have been unwilling to consider that I might have been right about macroeconomics because I had committed the unforgivable sin of being right about Iraq. (I told you this would be self-serving!)

Second, the whole story of our woeful crisis response has been that Very Serious People seize on orthodoxies that are grounded more in their gut feelings and the comfort that comes from repeating what everyone else says than in economic analysis. Central bankers are more given to analytical thinking than most, but it’s still a very brave official who disputes the orthodoxy of 2 percent, even though the original rationale for that target — it was supposed to make the zero lower bound no problem — has long since evaporated.

Finally, to be fair, there are arguments one can make that go beyond what I said in 1998. Some models of sticky prices suggest that inflation may have bigger costs than conventional models imply. I don’t find these models plausible, but it’s not all gut feelings here.

The bottom line, however, is that while you might think it obvious that a clearly relevant paper by a well-known guy with all the right credentials must be widely understood by people who matter, it ain’t necessarily so.

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