Krugman’s blog, 1/13/16

There were three posts yesterday.  The first was “Yes He Did:”


Sentier Research

These days many Americans live in an alternative political reality, in which the simplest factual assertions are met with anger and derision. When I, like many others, noted that job growth since Obamacare went into full effect has been the fastest since the 1990s — which is simply what the BLS data say — I got a barrage of mail from people claiming that I’m crazy, a liar, etc.. Similarly, but on of course a much bigger scale, a lot of what I’m seeing in reactions to the State of the Union amounts to the assertion that only an imbecile or a hack could believe Obama’s talk about the strength of the U.S. economy relative to other advanced countries — when that’s a simple fact.

But that involves grading on a curve, one where the average is dragged down by the awful performance of Europe. What does the economic record look like compared with our own past?

Not great, but not too bad.

Unemployment is, of course, more or less back to pre-crisis levels, but that’s in part due to falling labor force participation. So what’s happening to family incomes? Unfortunately, the Census data on those incomes come with a long lag, but Sentier Research now produces much more timely estimates (using the CPS data), which are shown above. What they say is that after a severe drop, median real household income is also roughly back to pre-crisis levels.

That’s not a great result; once upon a time we expected median income to be markedly higher at each business cycle peak than it was at the preceding peak. But that wasn’t true under Bush, who also only more or less presided over a return to the previous peak on the eve of the Great Recession — and the Bush-era economy only got there thanks to a disastrous housing bubble. (As an aside: median income didn’t rise much under Reagan either.)

So the Obama macroeconomic record isn’t just one of stabilizing the economy after a terrifying crisis; he has also presided over overall income growth that, assuming we don’t have another recession this year, will have been better than his predecessor.

And meanwhile we’ve seen a dramatic reduction in the number of uninsured Americans, so while income has been flat, incomesecurity is up substantially.

Of course, none of this will make any dent on the conviction of the usual suspects that everything has been a disaster. But really, Obama has cause for satisfaction though not triumph.

Yesterday’s second post was “Mind-Altering Economics:”

Adam Ozimek has a nice article arguing against the view that economics is just ideology, that

economists and those who read economics are locked into ideologically motivated beliefs—liberals versus conservatives, for example—and just pick whatever empirical evidence supports those pre-conceived positions.

He argues instead that

solid empirical evidence, even of the complicated econometric sort, changes plenty of minds.

I have a few quibbles. Surely some — perhaps all too many — economists are indeed locked into ideologically motivated beliefs. Consider the response of fresh-water macroeconomists to the utter failure of their predictions about inflation; who other than Narayana Kocherlakota has made the slightest concession to the people who got it right? I’m also skeptical about the persuasive power of complicated econometrics; my sense is that mind-changing empirical work almost always involves not much more than simple correlations, usually from natural experiments — that is, even multiple regression turns out, in practice, to be too complicated to persuade.

On the other hand, I would argue that empirical work isn’t the only thing that can change minds: really clear analytical arguments can do it too, by letting economists see things that were in front of their noses but overlooked because they didn’t have a framework.

Personal experiences: my mind was strongly changed by the empirical work on minimum wages that started with Card and Krueger; a summary and further evidence is here. I used to be a very conventional, Econ 101 person on this subject, figuring that the labor market would work like any market with a price floor. But the accumulation of evidence when some states raised minimum wages while neighbors didn’t — a classic natural experiment — made it clear that at least for the US, at current minimums, there is little or not negative effect on employment.

On analytics: I have personally had several experiences of entering a subject with a clear preconception, knowing what had to be true, working up a model that was supposed to confirm my intuition, and finding both that the model said no such thing and that I ended up persuaded that my original intuition was wrong.

This happened in my work on increasing returns and trade, way back when. There was at the time a sort of trade “counter-culture”, rejecting comparative advantage as the sole story and asserting things like the “home market effect”, where countries tended to export things for which they had strong domestic demand. While I took non-comparative advantage trade seriously, I was sure that the home market effect would boil away in my models; instead, it came in clearly, and I ended up asserting that the effect was real and made a lot of sense.

Years later, thinking about Japan in the 1990s, I was quite sure that arguments about the ineffectiveness of monetary policy were all wrong — even at zero interest rates, printing money simply had to be effective. But when I tried to model it I ended up finding that this intuition was wrong; that analysis has stood me in very good stead now that we’re all Japan.

So where’s the ideology here? The minimum wage issue is politically charged, of course, but my conversion reflected evidence, not a move to the left (I’d been writing about inequality long before I changed views on minimum wages.) The trade stuff has no ideological bent I can see. And when I changed views about monetary policy, it was about Japan and had nothing to do with a desire for fiscal expansion in the US.

Again, the point is that the discipline of economics is, or at least can be, real — it can lead you, via evidence and/or analysis, to a different place from where you started. And if you’re an economist and that has never happened to you, you should take a long hard look in the mirror.

The last post yesterday was “Paul Ryan Dada:”

OK, Paul Ryan is messing with our heads, although “messing” isn’t really the word I want to use.

You see, in a press conference yesterday Ryan denied that President Obama deserves credit for the economy’s growth, declaring that it was the Fed’s policies (which he then, mysteriously, described as “trickle-down economics” — which I thought Republicans favor).

So, the economy has succeeded because the Fed followed the policies that Ryan himself denounced as inflationary measures that would “debase the currency,” not to mention part of a corrupt conspiracy to bail out fiscal policy (remember, John Taylor co-authored that one).

There’s no possible way this makes sense. Even if you give all the credit to the Fed, Obama gets points for keeping people like Ryan off Bernanke’s back. Not to mention all the claims that everything Obama did was “job-killing”; if a bit of easy money is all it takes to avoid the terrible effects of “more regulations, higher taxes, more uncertainty”, then let the regulations rip!

The only way to parse this is to accept that Ryan is engaged in absurdist performance art. Either that or he thinks we’re all androids, and he’s trying to overload our logic circuits.

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