Krugman’s blog, 12/30/15

There were two posts yesterday.  The first was “Presidents and the Economy:”


Congressional Budget Office

After I put up my post comparing private-sector jobs under Obama and Bush, a number of people asked me whether I believe that presidents have a large effect on economic performance. My answer is no — but conservatives believe that they do, which is why this kind of comparison is useful.

To expand on my own views, in normal times the economy’s macroeconomic performance mainly depends on monetary policy, which isn’t under White House control. Now, we’ve been in a liquidity trap for the whole Obama administration so far, giving fiscal policy a much more central role — and the initial stimulus did help quite a lot. Since 2010, however, fiscal policy has been paralyzed by GOP obstruction, so we’re back to a situation where the WH has little influence.

The point, however, is that the right has insisted non-stop that Obama was doing terrible things to the economy — that health reform was a job-killer (one of the dozens of House votes repealing Obamacare was called the Repealing the Job-Killing Health Care Law Act.) The tax hike on the top 1 percent in 2013 was also supposed to destroy the economy (much as the same people predicted disaster from the Clinton hike 20 years earlier.) Financial reform was similarly supposed to be hugely destructive. And there was constant invocation of the “Ma, he’s looking at me funny” doctrine — the claim that Obama, by not praising businessmen sufficiently, was scaring away the confidence fairy.

Given all that, the fact that the private sector has added more than twice as many jobs under that job-killing Obama as it did under pre-crisis Bush is important, not because Obama did it, but because it shows that there is no hint that the important things he did do had any negative effect at all, let alone the terrible effects right-wingers predicted. You can, it turns out, tax the rich, regulate the banks, and expand health insurance coverage without punishment by the invisible hand.

The second post yesterday was “Respectable Radicalism:”

Brad DeLong, riffing off Larry Summers, asks about what is driving the Fed – and argues that Larry has it wrong, that the Fed’s problem is not an “excessive commitment to existing models.” On the contrary, the Fed seems to hold beliefs that are very much at odds with Macroeconomics 101, whose basic Hicksian models do not at all support the Fed’s eagerness to hike rates.

Indeed. This is a thesis I’ve tried to argue for a number of years; back in 2011 I noted that

[S]upposedly sober, serious people are actually radicals insisting that we can make the economy work in ways that it has never worked in the past … Meanwhile, the irresponsible bearded professors are actually the custodians of traditional wisdom.

I suspect that Larry is talking about hysteresis, which is indeed a departure from standard models. But the case that the risks of hiking too soon and too late are deeply asymmetric comes right out of IS-LM with a zero lower bound – which is basically the framework I used in the paper Brad addresses.

I think I understand how being an official, surrounded by men (and some but not many women) who seem knowledgeable in the ways of the world, can create a conviction that you and your colleagues know more than is in the textbooks. And that may even be true in normal times, when recent experience counts a lot. But in a world of zero-lower-bound macroeconomics, which is a world nobody not Japanese experienced for three generations, theory and history are much more important than market savvy. I would have expected current Fed management to understand that; but apparently not.

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