Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog from 4/28/16

April 30, 2016

Here’s “Impurity in the Pursuit of Salvation Is No Vice:”

David Roberts continues his carbon tax series. First he argued that such a tax isn’t the be-all and end-all of climate policy; he concludes with a discussion of the political economy, and argues that a carbon tax should be sold as part of a package, with the revenue dedicated to things like clean energy promotion.

I very much agree with the spirit, and probably with the specifics.

The common idea, among economists anyway, that a carbon tax should ideally be paired with offsetting cuts in other taxes, looks good in terms of Econ 101, and sounds like something that should help sell the thing to the public — that is, it sounds that way if you imagine that the public consists of econ grad students. In reality, revenue neutrality is an abstract concept that people will not, in general, believe in even if you try to explain it. Linking a new tax to some concrete goal is much more likely to work politically.

How do I know this? Look at the new taxes that have in fact been passed over the decades. The payroll tax was created — and increased a lot over time — by tying it to Social Security and Medicare. A significant part of the new taxes enacted under Obama were directly tied to the funding of the ACA. Economists may point out that such links are basically a fiction — the government has a bunch of revenue sources, it has a bunch of spending commitments, and any link between an item in column A and an item in column B is more or less arbitrary. But the people who set it up that way weren’t stupid, they were responding to a shrewd assessment of how voters think. Oh, and voters aren’t necessarily stupid either: they don’t do budget analysis, but they do resort to various rough heuristics to make sense of complex issues, and is that such a bad thing?

So I’m with Roberts here: do whatever is likely to work. Don’t insist that a perfect, Econ 101 revenue-neutral carbon tax is the only way to go. A mix of regulations, dedicated taxes, subsidies, whatever, as long as it makes a big difference to emissions is just fine.

Krugman’s blog, 4/25/16

April 26, 2016

There were two posts yesterday.  The first was “Economics and Self-Awareness:”

Noah Smith has another interesting piece on methodology, inspired by the Friedman-Sanders economic projections controversy. His bottom line — don’t let your economic analysis be dictated by what you want to be true, or what you think would be good for people to believe — is exactly right. But I think there’s a bit more to be said about the process of using economic models, and why — in my experience — they can be especially helpful on politically or emotionally charged issues.

You might say that the way to go about research is to approach issues with a pure heart and mind: seek the truth, and derive any policy conclusions afterwards. But that, I suspect, is rarely how things work. After all, the reason you study an issue at all is usually that you care about it, that there’s something you want to achieve or see happen. Motivation is always there; the trick is to do all you can to avoid motivated reasoning that validates what you want to hear.

In my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead someplace you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

Let me give a personal example. Some of the best work I’ve ever done, I still believe, is my late-1990s analysis of the liquidity trap, inspired by the troubles of Japan. The thing is, the origin of that work was an attempt on my part to prove something I believed at the time — namely, that Japanese monetary authorities were just falling down on the job, that they could end deflation if they would just try harder. At the time, I was very much part of the mainstream consensus that viewed fiscal policy as old stuff, and saw monetary policy as all we needed for stabilization; I had been making fun of people like William Greider, who saw us facing inadequate demand forever thanks to automation. I wanted to show that Japan posed no big challenge for that consensus, and offered no comfort for Greiderish thinking.

Now, I was aware that IS-LM analysis didn’t support my complacency — but I was sure that this was just a limitation of that analysis, which after all was ad hoc about a lot of stuff, indeed didn’t necessarily honor all budget constraints. Surely if you stuffed money into the system it would have to go somewhere. All I needed was a simple model with all the i’s dotted and t’s crossed, and it would show that the liquidity trap was a myth.

Except that the model didn’t say that; it said that unless current monetary expansion raised expectations of future inflation, it wouldn’t have any effect at the zero lower bound. That is, it was saying that the liquidity trap was real.

I guess I could have thrown out the result and gone in search of another approach that told me what I wanted to hear — but what I did instead was rethink my preconceptions. The more I thought about it, the more sense the result made.

Oh, and the model also said positive things about fiscal policy — actually, a multiplier of one even with full Ricardian equivalence, although I bobbled that in the original paper, because I didn’t use the model carefully enough. That was definitely not what I was looking for at the time.

And it seems to me that the worldview I reached after going through that process stood me in very good stead after 2008, when we all turned Japanese, and the predictions of that kind of model about inflation and deficit spending were vastly more accurate than the scare stories so popular on CNBC etc… It was kind of funny if annoying to have right-wingers insisting that all this Keynesian analysis people like me were doing was just an attempt to invent reasons for government spending; actually it came out of an attempt to show that this spending *wasn’t* necessary, but the discipline of modeling led me to revise my views.

Am I always and everywhere innocent of motivated reasoning? Surely not — no saint, me. But I try to fight it. And I have no patience for people who are eager to assume that what they want to believe is true.

Yesterday’s second post was “A Note on the Soda Tax Controversy:”

So Sanders and Clinton are arguing about soda taxes — Clinton for, as a way to raise money for good stuff while discouraging self-destructive behavior, Sanders against, because regressive. I have no illusions that rational argument will make much difference in the short run; we’re in that stage where anything Clinton supports is ipso facto evil. It’s like that point in 2008 when Obama supporters hated, hated the individual mandate that eventually became, as it had to, a central piece of Obamacare.

But anyway, it does seem worth pointing out that progressivity of taxes is not the most important thing, even when your concern is inequality. Notably, Nordic countries — very much including Denmark, which Sanders has praised as a model — rely heavily on the VAT, which is a regressive tax; but they use that revenue to pay for a strong social safety net, which is much more important.

If we add in the reality that heavy soda consumption really is destructive, with the consequences falling most heavily on low-income children, I’d say that Sanders is very much on the wrong side here. In fact, I very much doubt that he’d be raising the issue at all if he weren’t still hoping to pull off some kind of political Hail Mary pass.

Krugman’s blog, 4/23/16

April 25, 2016

There were two posts on Saturday, and none yesterday.  Saturday’s first post was “Boris Is Bad Enough:”

Thank you, Boris Johnson. You’ve finally given me the moral courage to weigh in on a subject I’ve been avoiding: Brexit, Britain’s possible exit from the European Union. It’s not as easy a case as I’d like – but Johnson’s intervention makes it clear: Britain should stay in, lest it empower people like him.

Let me start with the economics. There are a number of estimates of the economic impact of Brexit out there, from HM Treasury and independent analysts, but I like to have a quick-and-dirty calculation I understand; it’s not out of line with other, more detailed results.

Here it goes: before it joined the EU, Britain did only about a third of its trade with Europe. Now it’s about half, and it’s unlikely that much of that represents trade diversion. So unless Britain can negotiate something that looks like Norway’s deal – which would basically mean accepting EU policies in which it would no longer have a voice – we might expect Brexit to reduce the share of trade in British GDP from about 30 percent to about 25 percent.

What’s that worth? I’ve previously used the elegant Eaton-Kortum trade analysis as a benchmark for assessing globalization; it tells us that real income, for given technology, is (1-trade share)^(-1/theta), where theta is a parameter reflecting how much comparative advantage there is in the world (don’t ask). Eaton-Kortum suggest theta=4 fits best. In that case, Brexit would reduce British real income by 1.7 percent. Call it 2 percent, with the understanding that there are big error margins around all of this.

Should we, as some argue, multiply this by two or more to reflect dynamic gains? In general, I’m not fond of this practice – it smacks way too much of 101 boosterism, deriving a policy argument from basic economic models then invoking factors not in the models to make the argument seem much stronger than it is. Why tout the dynamic effects of trade as opposed to lots of other things?

But 2 percent is a lot! It’s very, very hard to come up with policies that will make a country 2 percent richer in perpetuity. You’d have to have very good reasons to leave the EU to be willing to make that big a sacrifice.

What about income distribution, which is a big issue in many trade agreements? In this case, it’s pretty much irrelevant: the EU is, on average, comparable in wages and per capita income to the UK, with much of the trade intraindustry specialization that has little distributional effect. So Trumpsandersism shouldn’t matter here.

So what’s this all about? In a word, governance. The case for Brexit is, basically, that EU membership ties Britain to a very badly run institution. And that case is, unfortunately, reasonably strong. Eurocrats have a lot to answer for: the huge mistake of the euro, the reckless and feckless promotion of austerity, the hapless response to the refugee crisis and in general the failure to take seriously the strains of internal migration. Oh, and Europe has been largely useless in dealing with the destruction of democracy in Hungary.

But to point to the EU’s failings as a reason to leave is, as George Stigler used to say, giving the prize in a singing contest to the second contestant because you’ve heard the first. If Britain does leave the EU, and escapes the grip of the Eurocrats, who will it be empowering instead?

You sometimes hear people saying that the attitudes and character of the pro-Brexit forces are not a valid argument for staying in. But that’s wrong: asking who would call the shots afterwards, who would be strengthened, is extremely relevant.

And that’s where Boris Johnson’s tirade against President Obama is so wonderfully clarifying. It tells us who the anti-EU wing of the Conservatives really are; it tells us not just that they are pretty close to UKIP, but that intellectually and emotionally they live in the same fever swamps as the American right. And they would, all too probably, take on a strong, even dominant role in British politics post-Brexit.

So Britain, don’t do this. You would pay a fairly large economic price, and in return you would get governance so bad that it would make the EU look good.

The second post was “Nomentum and the Vindication of Political Science:”

Back in November — which seems like a very long time ago — I noted that political scientists were having some trouble with the nomination process; the whole “party decides” framework led them, by and large, to expect convergence on a mainstream candidate like Jeb Bush or Marco Rubio, not a duel between Mussolini and Torquemada. At the time I put this down to “regime change”; at this point I’d be more specific, and say that the political science profession basically had a blind spot about the transformation of the GOP into an extremist party. That’s why Norman Ornstein, who did face up to that reality, was so much closer to the mark than most of his colleagues.

But while poli sci had a big miss in the fall, since the primary season got underway it has done very well, at least as compared with standard political punditry.

Put it this way: there have been two narratives of the campaign. One is full of ups and downs, momentum and stunning reversals. Trump is doomed! He’s inevitable! Bernie has won seven in a row — can he be stopped?

The other sees a fairly stable race, with state-by-state results mostly reflecting demographic differences. In this view, momentum is just a bad metaphor; it involves treating what is basically noise — e.g., a string of very white states with open primaries, which favored Sanders — as signal. As Alan Abramowitz noted yesterday, the Democratic race in particular is quite well explained by a model in which just three factors determine the Clinton vote share: whether it’s in the South, the percentage of African-Americans, and the share of Democrats (as opposed to independents) in the voting. Nate Cohn has what I believe to be a similar although slightly more complicated model, and has been trying to make the same point. Here’s what Abramowitz’s analysis looks like:

Thus, Clinton’s big win in New York wasn’t a shocking reversal of Sanders momentum; it was what you’d expect in a state whose demographics looked much more like the Democratic party as a whole than the states Sanders had won in the preceding weeks. (Notice that Clinton’s overall lead in the popular vote, 15 percent, is almost the same as her margin in New York.)

The point is that horserace punditry has been consistently, er, trumped by statistical analysis all along. Quantitative political science is looking pretty good.

Krugman’s blog, 4/22/16

April 23, 2016

There was one post yesterday, “Sarandonizing Economics:”

The Democratic primary is essentially over, although the Sanders campaign is still fundraising off naive supporters by claiming that it has a real shot. But the controversies will live on, for a while at least. Among these controversies, the debate over economic analysis is probably well down the list of importance; but it’s obviously one that I care about. And I see that Pro Growth Liberal is complaining about Gerald Friedman’s latest attempt to defend his estimates for growth from the Sanders program.

The history, for those who weren’t paying attention, is that Friedman produced huge numbers that were hard to understand on both the demand and the supply side. Initially, he didn’t claim to be doing anything especially new — on the contrary, he and his defenders claimed that they were doing standard Keynesian economics — apparently unaware that they were doing no such thing. Only after this was pointed out did they turn to declaring that the standard analysis was all wrong, and that Keynesians like Christina and David Romer are really just neoclassical types.

For those of us who participated in the austerity debates, that’s pretty amazing and disheartening. Remember when Robert Lucas accused Christy Romer of corruptly producing “schlock economics” to justify government spending? Remember the long fight against the doctrine of expansionary austerity and the mythical cliff at 90 percent debt? There was a huge division between Keynesians and anti-Keynesians, in which people like the Romers faced a torrent of abuse from the right. And there has also been a huge intellectual vindication, with interest rates, inflation, and output looking much more like Keynesian predictions than like what those on the right were predicting.

Oh, and on the issue where Lucas accused Romer of corruption: her estimate of a multiplier of 1.5 turns out to be very close to the numbers most researchers have found in the aftermath of the disastrous turn to austerity.

But now any skepticism about claims that multipliers are vastly higher than that, and that there are no supply constraints preventing the U.S. economy from growing 4.5 percent for the next decade, makes you no different from the inflation and debt fear mongers of the right.

The way to think about this, I’d say, is that it’s the economics nerd equivalent of Susan Sarandon dismissing Hillary Clinton as “the best Republican out there.” Anyone who tells you that you can’t get everything you want, in economics or politics, is just evil and useless.

Will this attitude persist as we enter an election in which the choice is between Clinton and Trump or Cruz, between Romer-type economics and Ayn Randism? We’ll see.

Krugman’s blog, 4/20/16

April 21, 2016

There was one post yesterday, “101 Boosterism:”

I see that @drvox is writing a big piece on carbon pricing – and agonizing over length and time. I don’t want to step on his forthcoming message, but what he’s said so far helped crystallize something I’ve meant to write about for a while, a phenomenon I’ll call “101 boosterism.”

The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.

My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face.

The example I think of most is in my original home field of international trade. Comparative advantage says that countries are made richer by international trade, even if one trading partner is more productive than the other across the board, and the less productive country can only export thanks to low wages. Paul Samuelson once declared this the prime example of an economic insight that is true without being obvious – and to this day you get furious attempts to refute the concept. So comparative advantage has, for generations, been considered one of the crown jewels of economic analysis.

Now, there are a variety of reasons why, despite this big insight, free trade may not be the right policy – that’s Noah’s 101ism. But I want to make a different point: even if comparative advantage is a profound insight, does this make free trade versus protectionism a front-burner issue? How important is this insight, anyway?

And the answer – the answer that comes from standard trade models – is, not as important as many people seem to think. Yes, protectionism reduces world income. But if you want to make the case that trade liberalization has been the principal driver of growth, or anything along those lines, well, the models don’t say that. If you want enormous benefits to trade, you have to invoke things like technology transfer that aren’t in the very analysis that gives the case for free trade such prestige.

In fact, you see a lot of that. There’s a kind of bait and switch, in which people invoke Ricardo and the gains from trade to say “free trade good”, then tell scare stories about how protectionism would destroy millions of jobs and cause a global depression, which doesn’t make much sense – and in any case has nothing to do with the classical analysis of the gains from trade.

It seems to me that there’s something similar involved in discussions of carbon pricing.

Econ 101 tells us that if you want to reduce emissions of a pollutant, the most efficient way to do that is to put a price on emissions, so that all possible routes to reduction are taken, and the marginal cost is the same for all routes. It’s a real insight, and has had positive impacts on real-world policy — cap-and-trade has worked very well at reducing acid rain.

That said, there are reasons Econ 101 may not be right here. There is some evidence that consumers aren’t hyper rational when it comes to conservation, that they may pass up conservation opportunities even when it would save them money — and in that case rule rather than prices may be the right way to make them change. And to the extent that we’re talking about innovation, the Econ 101 case says nothing at all: the efficiency case for carbon pricing is about making best use of existing technology, not about providing incentives to develop better technology.

But leave all that aside, and ask: how *important* is it that our carbon-emissions strategy take the form of a universal or near-universal price on carbon?

The answer, in principle, is that it depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution — telling, say, power companies what to do or not to do — is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve a fairly limited set of measures — such as putting a quick end to the practice of burning coal to generate electricity — getting to broad-based carbon pricing is much less central.

And what I gather from reading various analyses of our prospects is that we’re closer to case #2 than to case #1: the problem of limiting climate change isn’t all that complex. End coal-burning and you’ve gone a significant way; a few other big things get you another substantial part of the way. Yes, comprehensive carbon pricing would be best, but it’s not the sine qua non of effective action.

The point is that just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance, here or elsewhere. People should know what’s in the textbook; above all, they should buy my book! But never imagine that it’s the be-all and end-all of what matters.

Krugman’s blog, 4/16/16

April 18, 2016

There was one post on Saturday, and none yesterday.  Saturday’s post was “The Return of Elasticity Pessimism (Wonkish):”

I talked at the Council for European Studies conference in Philly last night, and was surprised by one aspect of the discussion. As you might expect if you’re into these things, my take on the euro was strongly informed by the theory of Optimum Currency Areas; I expected pushback. But I didn’t realize how many people now seem to believe that real exchange rates don’t matter for adjustment — that is, that even internal devaluation (downward adjustment of prices and wages relative to trading partners) isn’t necessary in the aftermath of unsustainable capital inflows.

It turns out, however, that we’re seeing a significant revival of the “elasticity pessimism” widely prevalent during the post World War II “dollar shortage”. This was the belief that trade flows barely respond to price signals, and hence that devaluations don’t help alleviate imbalances. Now as then, the argument rests in large part on specific cases where large changes in relative prices don’t seem to have produced large changes in trade (Greece’s lagging exports), or conversely, where large changes in trade seem to have happened without large changes in relative prices (Spain’s export recovery, maybe).

The difference is that in the late 1940s this kind of argument was deployed in support of more government intervention — keep those exchange controls in place, because devaluation won’t work — whereas now it’s being deployed as an argument against activism — never mind the euro, it’s all rigidities that must be cured with structural reform.

But while the purposes may be different, the substantive issues remain. What is the case against elasticity pessimism?

I guess I’d offer several answers.

First, it’s worth thinking about where those big external imbalances came from. Big capital flows to the European periphery led to inflation and rising real exchange rates, and this was associated with huge trade imbalances. How did that happen, if real exchange rates don’t matter?

Second, my sense is that at least some analyses aren’t taking sufficient account of cyclical factors. Devaluation that takes place along with an economic recovery may not be associated with a falling trade deficit, because rising demand is offsetting improved competitiveness — I think this is relevant for Iceland. Also important for understanding why sudden stops produce large import contractions even under fixed rates.

Third, there are lots of other factors, so you have to avoid picking and choosing your stories too much. One way to do this may be to do what one recent IMF study did: focus only on large real exchange rate changes, estimate elasticities for lots of countries, and pool the results. The result is to diminish the noise, both by eliminating small fluctuations that may be statistical illusions and by exploiting the power of large numbers.

Beyond all this, however, we probably need to revisit the classic 1950 Orcutt analysis of likely biases in estimates of trade response to prices.

I guess I’m showing a strong preconception here — that done right, analysis will show that trade elasticities remain fairly large. Certainly willing to be proved wrong — but we need to do this carefully, because it’s really important for future policy.

Krugman’s blog, 4/15/16

April 16, 2016

There was one post yesterday, “Why I Haven’t Felt The Bern:”

Today’s column offers an opportunity to say, for the record, why I haven’t been the Bernie booster a lot of people apparently expected me to be. For the business about discounting Clinton support as coming from “conservative states” in the “Deep South” actually exemplifies the problem I saw in the Sanders campaign from the beginning, and made me distrust both the movement and the man.

What you see, on this as on multiple issues, is the casual adoption, with no visible effort to check the premises, of a story line that sounds good. It’s all about the big banks; single-payer is there for the taking if only we want it; government spending will yield huge payoffs — not the more modest payoffs conventional Keynesian analysis suggests; Republican support will vanish if we take on corporate media.

In each case the story runs into big trouble if you do a bit of homework; if not completely wrong, it needs a lot of qualification. But the all-purpose response to anyone who raises questions is that she or he is a member of the establishment, personally corrupt, etc.. Ad hominem attacks aren’t a final line of defense, they’re argument #1.

I know some people think that I’m obsessing over trivial policy details, but they’re missing the point. It’s about an attitude, the sense that righteousness excuses you from the need for hard thinking and that any questioning of the righteous is treason to the cause. When you see Sanders supporters going over the top about “corporate whores” and such, you’re not seeing a mysterious intrusion of bad behavior into an idealistic movement; you’re seeing the intolerance that was always just under the surface of the movement, right from the start.

Does Clinton have problems too? Of course — she’s been too cozy with established interests in the past, she shouldn’t have given those speeches, and of course she shouldn’t have voted for the Iraq War. But there is no evidence that she’s corrupt, and lots of evidence that she both thinks hard about issues and is willing to revise her views in the light of facts and experience. Those are important virtues — important *progressive* virtues — that seem woefully absent on the other side of the primary.

But never mind. As you know, I’m only saying these things because I’m a corporate whore and want a job with Hillary.

Krugman’s blog, 4/14/16

April 15, 2016

There was one post yesterday, “No Time for Credibility:”

So, here we are with near-zero real interest rates on long-term government bonds; with a desperate need for infrastructure investment; with strong reason to believe that deficit spending in the current environment would actually improve the long-run fiscal picture, because the interest burden would be so low and higher growth would raise future revenues.

And Time magazine decides that now is a good time to devote its cover to dire prophecies about looming US insolvency, with the lead article by James Grant — signatory of the infamous 2010 letterwarning Ben Bernanke that his policies would cause inflation and debase the dollar, crusader for a return to the gold standard.

Was Time purchased by Zero Hedge when I wasn’t looking? Who thought this was a great way to make the magazine relevant and credible right now?

Krugman’s blog, 4/13/16

April 14, 2016

There were two posts yesterday.  The first was “Why Monetarism Failed:”

Brad DeLong asks why monetarism — broadly defined as the view that monetary policy can and should be used to stabilize economies — has more or less disappeared from the scene, both intellectually and politically. As it happens, I wrote about essentially the same question back in 2010, inspired by the more or less hysterical pushback against quantitative easing. I thought then and think now that this was fated to happen, that Milton Friedman’s project was always doomed to failure.

To repeat the key points of my argument:

On the intellectual side, the “neoclassical synthesis” — of which Friedman-style monetarism was essentially part, despite his occasional efforts to make it seem completely different — was inherently an awkward construct. Economists were urged to build everything from “micro foundations” — which was taken to mean perfect rationality and clearing markets, not realistic descriptions of individual behavior. But to get a macro picture that looked anything like the real world, and which justified monetary activism, you needed to assume that for some reason wages and prices were slow to adjust.

Inevitably the drive for purism collided with the realistic accommodations, the ad hockery, needed to be useful; sure enough, half the macroeconomics profession basically said, “what are you going to believe, our models or your lying eyes?” and abandoned any good sense Friedman had originally brought to the subject.

On the political side, there was a similar collision. Right-wingers insisted — Friedman taught them to insist — that government intervention was always bad, always made things worse. Monetarism added the clause, “except for monetary expansion to fight recessions.” Sooner or later gold bugs and Austrians, with their pure message, were going to write that escape clause out of the acceptable doctrine. So we have the most likely non-Trump GOP nominee calling for a gold standard, and the chairman of Ways and Means demanding that the Fed abandon its concerns about unemployment and focus only on controlling the never-materializing threat of inflation.

What about the reformicons, who pushed for neo-monetarism? We can sum up their fate in two words: Marco Rubio. There is no home for the kind of return to realism they were seeking.

The point is that the monetarist idea no longer serves any useful purpose, intellectually or politically. Hicksian macro — IS-LM or something like it — remains an extremely useful tool of both analysis and policy formulation; that tool is not helped by trying to state it in terms of monetary velocity and all that. And if you want macro policy that isn’t dictated by Ayn Rand logic, you have to turn to a Democrat; on the other side, there’s nobody rational to talk to. Sad!

The second post yesterday was “Is Cheap Oil Contractionary?”

Low oil prices were supposed to be a big boost for the world economy; but it didn’t happen. Maury Obstfeld, my long-time textbook co-author and now chief economist at the IMF, offers an interesting argument about why: he suggests that it’s because of the zero lower bound. Falling oil leads to falling inflation expectations, and since interest rates can’t fall, real rates go up, hurting recovery.

Matt O’Brien is skeptical, and so am I — even though I am very much in favor of rethinking our usual assumptions when the economy is at the ZLB.

First, a priori, falling oil prices shouldn’t affect expectations for the rate of inflation of non-oil goods and services, or at least it’s not obvious that it should — and that’s the inflation rate that should matter for investment. Still, you could argue that oil is in fact driving those expectations, whether it should or not. What Matt does is question whether correlation is causation.

I’d make another point: even using market expectations, real interest rates have in fact gone down, not up, in the face of falling oil prices:

How is this possible, given the zero lower bound? It’s all about the term structure: long-term rates aren’t at zero, although they’re at least somewhat supported by the floor on short-term rates. And as it turns out, during the recent oil crash long-term rates fell enough to more than offset the decline in expected inflation.

Of course, Maury could be right in an other things equal sense. But my guess is that the oil-price disappointment comes less from expectational channels than from two facts: oil is now a big driver of investment, via shale, and oil exporters are actually cash-constrained these days, with an arguably *higher* marginal propensity to spend than oil consumers.

Anyway, interesting stuff.

Krugman’s blog, 4/11/16

April 12, 2016

There was one post yesterday, “The Obamacare Replacement Mirage:”

Hype springs eternal — certainly when it comes to Paul Ryan, whose media image as a Serious, Honest Conservative and policy wonk seems utterly impervious to repeated demonstrations that he is neither serious nor honest, and that he actually knows very little about policy. And here we go again.

But what really amazes me about the latest set of stories is the promise that Ryan will finally deliver the Republican Obamacare alternative that his colleagues in Congress have somehow failed to produce after all these years. No, he won’t — because there is no alternative.

Or maybe I should say that there is no alternative to the right. Alternatives to the left do exist. True socialized medicine — an American NHS — would be feasible economically; so would single-payer, in the form of Medicare for all. The reasons we aren’t doing those are political.

But on the right, is there a more free-market, more privatized system that could replace the Affordable Care Act without causing the number of uninsured to soar? No, as some of us have tried to explain many times.

Once again: a useful starting point is the problem of people with pre-existing conditions. How can they be offered affordable insurance? You can prohibit insurers from discriminating on the basis of medical history — community rating. But if that’s all you do, only sicker people will sign up; many will wait until they get sick to buy insurance; and so costs will be high due to a bad risk pool.

So non-discrimination must be combined with an individual mandate, the requirement that everyone get insurance. But what about people who can’t afford it? There must be subsidies to lower-income families, so that they can.

What you end up with, then, is community rating + individual mandate + subsidies — that is, with Obamacare. There’s nothing arbitrary about it, and you can’t pick and choose from the elements: it’s a three-legged stool that needs all three legs to stand. And it can’t be made cheaper, either — the subsidies are already on the low end, requiring that the allowed policies can involve higher deductibles than they really should.

And all this, in turn, is the reason Republicans haven’t come up with an alternative. It’s not because they’re timid, or lazy, or stupid (they may be all these things, but that’s not why they’ve come up short). It’s because there is no alternative that wouldn’t involve taking coverage away from tens of millions.

So no, Ryan isn’t going to roll out a magical solution to this problem in the next couple of months. Even if he were the policy wonk he pretends to be, he couldn’t do the impossible.

Ryan earned the nickname “Zombie Eyed Granny Starver” for a reason.


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