Krugman’s blog, 11/26 and 11/27/15

There was one post on Thanksgiving and one yesterday.  Turkey Day’s post was “A Very Trump Thanksgiving:”

Source.

I awakened, long before dawn, to the sound of helicopters patrolling the Upper West Side. Many helicopters. I guess they’re protecting Snoopy. Then, over coffee, I read more Alan Abramowitz on how The Donald could be the nominee.

Indeed. All the rules have changed. Media mockery of Trump has no impact — perhaps because even the candidates considered respectable would have been considered out of bounds not that long ago. Consider the guy getting a lot of establishment puffery lately, supposedly making a comeback: he exemplifies the transition from a nation whose motto was “speak softly and carry a big stick” to one whose de facto motto is yell a lot and carry a strawberry smoothie.

Oh well. Time to get ready for the relatives.

Yesterday’s post was “Iceland, Ireland, and Devaluation Denial:”


International Monetary Fund

One of the big lessons of the euro crisis has been that Milton Friedman was right — not about monetarism, but about the case forflexible exchange rates. When big adjustments in a country’s wages and prices relative to trading partners are necessary, it’s much easier to achieve these adjustments via currency depreciation than via relative deflation — which is one main reason there have been such big costs to the euro.

But many economists remain deeply unwilling to accept this point. And so in Thordvaldur Gylfason’s otherwise useful survey of Iceland since the crisis, we get this:

In Ireland, the 2007 level of the purchasing power of per capita GNI was restored a year later than in Iceland, in 2014.

It is, therefore, not true that having its own currency (which lost a third of its value in real terms during the crash) saved Iceland from the sorry fate that Ireland would have to suffer because Ireland is anchored to the euro.

Ireland adjusted by other means. Iceland, had it used the euro, could have done the same. The Icelandic króna has lost 99.95% of its value vis-à-vis the Danish krone since 1939 when the two currencies were equivalent, convincing many local observers that Iceland is ripe for the adoption of the euro.

OK, the bit about depreciation since 1939 — 1939! — is a cheap shot. What about the Ireland comparison?

It’s true that Irish GDP per capita (in this case using GNI doesn’t make much difference) recovered to its pre-crisis level only a bit later than Iceland’s. But that’s not the only indicator, and it’s one that is arguably distorted by the nature of the Irish export sector, which held up fairly well and is highly capital-intensive (think pharmaceuticals) — that is, it contributes a lot to GDP but employs very few people.

If you look at employment instead, as in the chart, Iceland did far better than Ireland; and Icelandic unemployment similarly shows a much more favorable picture. Less formally, everyone I know who tracked both countries has the sense that the human toll in Iceland was much less than it was in Ireland.

Oh, and if you remember, everyone expected the Icelandic crisis to be much worse, given the incredible scale of the banking overreach — early on, comparisons between the two in Ireland were regarded as black humor, not something anyone expected to be meaningful.

I guess I understand the urge to make excuses for the single currency. But the evidence really does suggest that there are important advantages to keeping your own currency.

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