Krugman’s blog, 8/20/16

There was one post yesterday, “The Gridlock Economy:”


Wikipedia Commons

Duncan Weldon has a good think-piece on the peculiar circumstances that have brought negative interest rates to much of the advanced world. As he points out, it’s not just weak investment demand, with a strong whiff of secular stagnation; it’s also the choice of major economies to offer a response that

has been increasingly reliant on monetary policy to accelerate it with fiscal policy acting as brake (or at best staying neutral). This (and most of this post) applies especially in the Europe and to a lesser extent in the US.

He then points to what he considers a puzzle: given that very low interest rates hurt affluent (but not super-rich) older people, who tend to wield outsized political clout, why does this policy mix persist?

I agree that it’s a very good question, but not, I think, all that puzzling.

First of all, Weldon is presuming that older voters understand something about macroeconomic policies and what they do. No doubt there are some such people; but we know from polling that the general public is always and everywhere afraid of budget deficits and addicted to the household analogy. Furthermore, my impression — from watching CNBC now and then, looking at pop-up ads on web sites, overhearing conversations in barber shops, and other scientific methods — is that older people who do pay attention to economic debates are far more likely to say “Hyperinflation is coming! Ron Paul says so!” than they are to say, “I wish the government would increase the supply of safe assets.”

There’s also the role of Very Serious People, for whom deficit posturing is a signifier of identity; a posture that works in part because the public always thinks of deficits as a Bad Thing.

But beyond these cynical takes, it’s surely relevant that the two big advanced economies — the US and the eurozone — both have fiscal policy paralyzed by political gridlock, leaving the central banks as the only game in town.

In the U.S., it’s House Republicans who block spending on anything except weapons; they won’t even allocate funds for Zika! In Europe, nothing fiscal can happen without action by Germany, which is both self-satisfied with its situation and living in its own intellectual universe.

It’s true that the UK has some room for maneuver, yet under Cameron/Osborne it went all in for austerity, at least in rhetoric. On the other hand, that may be seen as a political maneuver to discredit the previous government by accusing it of profligacy, and may change quite a lot now that the disastrous duo are out and Theresa May is in.

Japan is, I think, an interesting case, because whatever else it may suffer from, it hasn’t faced US or EZ-type gridlock. It’s not as clean a case as I would like — Abe allowed himself to be talked by the Serious People into fiscal tightening early on, putting the whole burden on Kuroda. But if you look at the longer-term story since the 1990s, Japan actually has had a combination of deficit spending and relatively cautious monetary policy — more or less what Weldon thinks the political economy should be causing everywhere.

The problem now is that while advocates of more fiscal push seem to be winning the intellectual battle, the institutional arrangements that produce macro gridlock are likely to persist. It would take a yuuuge Democratic wave to break the gridlock here, and I have no idea what will unlock Europe.

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