Krugman’s blog, 1/16 and 1/17/16

There were three posts on Saturday and one yesterday.  Saturday’s first post was “Liber8 BB-8!:”

A few months ago I was on a panel at ComicCon — hey, who knew CES utility functions would lead me down this road? — discussing Trekonomics. Manu Saadia has a fun book on the subject, focusing on the transformative powers of replicators that make anything you want, but as we discussed, what about services? My on-the-fly take was that there was a conceptual problem: if we made machines smart enough to provide all our services, wouldn’t those machines effectively be people, deserving freedom from servitude?

Well, I found myself thinking about that while watching The Force Awakens the second time — sorry, I’m too old not to indulge my inner nerd. And it seems to me that our discussion its quite relevant. Think about the droids: they’re obviously sentient, are depicted as having emotions, form friendships. They are, in effect, people. Yet they’re treated as indentured servants at best, even by the good guys: Poe is referred to as BB-8’s “master”. If the movie had put a flesh-and-blood creature in that kind of position, the unacceptable connotations would be obvious. So what’s with the assumption of organic privilege?

Well, Asimov’s laws…  The second post on Saturday was “Oil Goes Nonlinear:”

When oil prices began their big plunge, it was widely assumed that the economic effects would be positive. Some of us were a bit skeptical. But maybe not skeptical enough: taking a global view, there’s a pretty good case that the oil plunge is having a distinctly negative impact. Why?

Well, think about why we used to believe that oil price declines were expansionary. Part of the answer was that they reduced inflation, freeing central banks to loosen monetary policy — not a relevant issue at a time when inflation is below target almost everywhere.

Beyond that, however, the usual view was that falling oil prices tended to redistribute income away from agents with low marginal propensities to spend toward agents with high marginal propensities to spend. Oil-rich Middle Eastern nations and Texas billionaires, so the story went, were sitting on huge piles of wealth, were therefore unlikely to face liquidity constraints, and could and would smooth out fluctuations in their income. Meanwhile, the benefits of lower oil prices would be spread widely, including to many consumers living paycheck to paycheck who would probably spend the windfall.

Now, part of the reason this logic doesn’t work the way it used to is that the rise of fracking means that there is a lot of investment spending closely tied to oil prices — investment spending that has relatively short lead times and will therefore fall quickly.

But there is, I believe, something else going on: there’s an important nonlinearity in the effects of oil fluctuations. A 10 or 20 percent decline in the price might work in the conventional way. But a 70 percent decline has really drastic effects on producers; they become more, not less, likely to be liquidity-constrained than consumers. Saudi Arabia is forced into drastic austerity policies; highly indebted fracking companies find themselves facing balance-sheet crises.

Or to put it differently: small oil price declines may be expansionary through usual channels, but really big declines set in motion a process of forced deleveraging among producers that can be a significant drag on the world economy, especially with the whole advanced world still in or near a liquidity trap.

Oh, and a belated Happy New Year.

Saturday’s third post was “TINA and the ACA:”

Lucy just snatched the football away, again. Republicans assured us that this year they really would, seriously, roll out their alternative to Obamacare. Or, maybe, not.

But I have the sense that some political analysts still don’t understand why the GOP keeps sheering away from proposing an alternative. It’s not because Republican leaders are cowards. It’s not because there are sharp divisions within the party about the shape of their plan. The reason Republicans haven’t offered an alternative is because there is no alternative.

Specifically, if you want to propose some other, less-intrusive system that won’t cause 10 or 15 or 20 million people to lose health insurance, it can’t be done. The Affordable Care Act looks the way it does because it has to.

My sense is that even reformocons, who imagine themselves more open-minded than the party’s base, still don’t get that. But the logic has been clear from the beginning.

Start with a goal almost everyone at least pretends to support: making coverage available to people with preexisting conditions. How can you do that? Well, unless you simply want to provide government insurance, you have to prohibit discrimination based on medical history by private insurers: guaranteed issue and community rating.

But just doing that isn’t enough, because community rating on its own means that people don’t sign up until they get sick, and you have a very poor risk pool. So you have to include an individual mandate, requiring that everyone get coverage. Note, by the way, that the individual mandate is essential in a way the employer mandate isn’t.

Yet you can’t have an individual mandate without some way of making insurance affordable for lower-income families. So the mandate has to be backed by means-tested subsidies.

And there you are: community rating, individual mandate, subsidies — ObamaRomneycare! Everything else is details.

True, single-payer would be an alternative, and I’d be for it if I thought it had any chance of happening. But that’s an alternative to the left; there is no alternative to the right.

That’s why Obamacare opponents really had to stop it before it happened. As long as it was just a plan, they could insist that it was unworkable — that it would not, in fact, cover the uninsured, that costs would soar, that it would cripple the economy. And the official GOP position is indeed that the law has failed; who you gonna believe, us or your lying eyes? But none of the bad things that were supposed to happen, did. And the repeal-and-replace crowd cannot come up with an alternative, because there isn’t one.

Yesterday’s sole post was “Die Hard Conservatives:”

Oh, my:

“I have a right to protect my family,” Rubio said in an interview on CBS’ “Face the Nation” on Sunday. “I have a right to protect my family if someone were to come after us. In fact, if ISIS were to visit us or our communities at any moment, the last line of defense between ISIS and my family is the ability I have to protect my family from them or from a criminal or anyone else who seeks to do us harm. Millions of Americans feel that way.”

Back when I was a new assistant professor, one of our grad students got mugged — New Haven was a rough place back then. Another student began boasting that he would have stood up to the muggers, and was, rightly, greeted with jeers: “And strangled them with your eyeglasses.” Adults are supposed to realize that they aren’t characters in a Bruce Willis movie.

But Republican presidential candidates not only have such fantasies, but are proud of them.

Awesome.

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One Response to “Krugman’s blog, 1/16 and 1/17/16”

  1. Anders Says:

    Where to begin? I guess the place to start is to note that Krugman commits a cardinal economic error (you’re shocked, I’m sure): he argues from a price change. What is frightening is that if you believe his characterization of the received wisdom in macroeconomics, this is the standard way of thinking about these things in macro.

    Prices do not move exogenously. Prices can go down because of supply shocks. They can go down because of demand shocks. The price movement is the same direction, but the implications are very different. In particular, the implications for co-movements between oil prices and asset prices are very different. You cannot analyze based on the fact of the price change alone: your analysis must be predicated on what is driving that change.

    A price decline because of a favorable supply shock is generally positive for the broader world economy. Yes it is bad for oil producers, but especially for advanced and most emerging economies who are oil/commodity shorts, a supply-driven price decline is beneficial and should be associated with higher stock prices, economic growth, etc. The production possibility frontier shifts out, leading to higher incomes overall although in a world with incomplete risk sharing there are distributive effects. But the adverse consequences for producers are almost always swamped by consumer gains. In this scenario, growth and asset prices on the one hand, and commodity prices on the other, move in opposite directions.

    Things are very different for demand shocks-driven price changes. A price decline because of an adverse demand shock is generally negative for the broader world economy, because it is a weakening world economy that is the major source of the demand decline. This is a matter of correlation, not causation. Causation runs from a weakening economy to lower demand for oil (and other commodities) to lower commodity prices and lower asset prices. Oil price (and asset price) changes are an effect not a cause.

    The current situation is much closer to the latter case than the former. Yes, there have been oil production increases in the last couple of years, but if world economic growth had continued on its pre-mid-2014 pace, demand would have grown sufficiently to absorb this increase. In fact, the decline in oil and other commodity prices starting around June 2014 occurred right about the time that world growth forecasts declined appreciably. Subsequent months have seen a litany of bad growth news from the main sources of commodity demand growth in the boom years, most notably, of course, China. And the news from China keeps getting worse. This is reflected in cratering stock prices there, and other indicia of economic activity. (Notably all of these indicia are pretty much non-official. Official Chinese statistics should be nominated for the next Nobel Prize in Fiction.)

    But rather than go back to basics, Krugman assembles a Rube Goldberg contraption to explain what is going on. And of course, austerity and the liquidity trap play a starring role:

    But there is, I believe, something else going on: there’s an important nonlinearity in the effects of oil fluctuations. A 10 or 20 percent decline in the price might work in the conventional way. But a 70 percent decline has really drastic effects on producers; they become more, not less, likely to be liquidity-constrained than consumers. Saudi Arabia is forced into drastic austerity policies; highly indebted fracking companies find themselves facing balance-sheet crises.

    Or to put it differently: small oil price declines may be expansionary through usual channels, but really big declines set in motion a process of forced deleveraging among producers that can be a significant drag on the world economy, especially with the whole advanced world still in or near a liquidity trap.

    Since because of his cardinal error Krugman does not identify what caused the price decline that begins his chain of “reasoning,” it’s hard to understand fully what he means. The most charitable interpretation is that there was a favorable supply shock that was so big that it caused such a large price decline in oil that this caused world “aggregate demand” to decline because of the severe adverse consequences on indebted and liquidity constrained producing countries and companies.

    Inane. For one thing, these economies and sectors are very small in comparison to the world economy. Commodity producing countries have historically suffered major financial crises with little, if any, effect on growth world-wide, or on asset prices world-wide. The US oil and gas sector has also undergone some severe crises (e.g., 1986-1987) with limited fallout on US and world growth: the impacts tended to be concentrated regionally in the producing states, such as Texas. Not much fun there, but the rest of the country and the world didn’t much notice. In fact, they benefited from the favorable oil supply shock.

    For another, even if there is some asymmetry between the “liquidity constraints” of producers and consumers, Krugman has been arguing strenuously that US and European consumers are liquidity constrained, hence his constant attacks on austerity. In Krugman’s argue-from-a-price-change story, that liquidity constraint has eased, and therefore one would expect to see improvement in consumption growth in places like the US, but the reverse is in fact true. The US economy is slowing rather noticeably.

    No. The back-to-basics-trace-the-cause-of-the-price-change story is much more plausible. And here’s the irony. The epicenter of the commodity demand and world growth shock is China, which has binged on credit stimulus since 2009 in a way that Krugman should approve. But that cannot go on forever, and indeed, the main source of problems in China is the recognition that it can’t go on forever. China faces colossal balance-sheet issues that make deleveraging inevitable. When that happens, the commodity crisis will enter a new phase. How bad it is depends on how well the Chinese handle it. Given their mania for central control, I do not believe they will handle it well.

    Macro panjandrums, like Oliver Blanchard, are puzzled, because official data do not yet reflect any large decline in growth. But that’s because official data are backward looking, and markets look forward relentlessly. They are signaling current and future problems, which official data will eventually validate. (And that’s when the data aren’t made up, as is notoriously the case in China.)

    Commodity prices are particularly important, because commodities are consumed in the here and now. When demand declines, consumption declines, and prices decline contemporaneously. For all the talk about financialization, that can’t overcome the decisions of billions of commodity consumers around the world. Thus, at present, the high positive correlation between commodity prices and asset prices, like in 2008-2009, is a symptom and harbinger of broader economic problems. You don’t need Rube Krugman contraptions to explain that.

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