Krugman’s blog, 6/18/16

There were two posts yesterday.  The first was “Is Our Economists Learning?”:

Bernie is doing his long — very, very, very long — goodbye; Trump appears to be flaming out. So, time to revisit some macroeconomics.

Brad DeLong has an excellent presentation on the sad history of belief in the confidence fairy and its dire effects on policy. One of his themes is the bad behavior of quite a few professional economists, who invented new doctrines on the fly to justify their opposition to stimulus and desire for austerity even in the face of a depression and zero interest rates.

One quibble: I don’t think Brad makes it clear just how bad the Lucas-type claim that government spending would crowd out private investment even at the zero lower bound really was. You see, it didn’t even follow from Ricardian equivalence.

Anyway, two things crossed my virtual desk today that reinforce the point about how badly some of my colleagues continue to deal with fiscal policy issues.

First, Greg Mankiw has a piece that talks about Alesina-Ardagna on expansionary austerity without mentioning any of the multiple studies refuting their results. And wait, there’s more. As @obsoletedogma (Matt O’Brien) notes, he cites a 2002 Blanchard paper skeptical about fiscal stimulus while somehow not mentioning the famous 2013 Blanchard-Leigh paper showing that multipliers are much bigger than the IMF thought.

Second, I see a note from David Folkerts-Landau of Deutsche Bank lambasting the ECB for its easy-money policies, because

by appointing itself the eurozone’s “whatever it takes” saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation.

Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.

Yep. That “catharsis” worked really well when Chancellor Brüning did it, didn’t it?

What strikes me is the contrast with the 1970s. Back then the experience of stagflation led to a dramatic revision of both macroeconomics and policy doctrine. This time far worse economic events, and predictions by freshwater economists far more at odds with experience than the mistakes of Keynesians in the past, seem to have produced no concessions whatsoever.

The second post yesterday was “A Question For the Fed:”

There is a near-consensus at the FOMC that rates must eventually move up. But here’s my question: why, exactly? Specifically, which component of aggregate demand do we believe will continue to strengthen in a way that will require monetary tightening to avoid an overheating economy?

Here’s a look at two obvious candidates, nonresidential (business) and residential investment. I’ve expressed both as shares of potential GDP, and further normalized by taking deviations from the 1990-2007 average of these shares:

Nonresidential investment has basically recovered from the recession-induced slump. Residential investment is still a bit low by historical standards, but not as much as you might think if your baseline is the boom of the mid-naughties. And given the slowing growth of the working-age population — down from more than 1 percent a year to less than 0.5 — should’t we expect some reduction in home construction?

So I don’t see an obvious reason to believe that current rates are too low. Yes, they’re near zero — but that in itself doesn’t mean too low.

Like others, notably Larry Summers, I think the Fed is trying to return to a normality that is no longer normal.



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