Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 8/22/16

August 23, 2016

There was one post yesterday, “What Do The Simple Folk Do?”:

Brad DeLong writes about pundits like Niall Ferguson who fantasize about a vast class of regular people — Real Americans — who practice traditional values, don’t eat fancy food, and vote for good, family-values Republicans who promise war. I’m surprised that he doesn’t mention Andrew Sullivan after 9/11:

The middle part of the country – the great red zone that voted for Bush – is clearly ready for war. The decadent left in its enclaves on the coasts is not dead -and may well mount a fifth column.

As Brad is, I think, suggesting, this whole line is both wrong and disreputable on several levels. For one thing, these Real Americans are in fact a quite small minority, smaller, in fact, than the nonwhite population. For another, the idea that non-college-educated whites are — or ever were! — a repository of traditional values and virtues is silly. Some are, some aren’t; they’re people, with all the variety you see among people of any class or ethnic group.

But most of all, this kind of punditry, while ostensibly praising the Real America, is in fact marked by deep condescension. One pats the simple folk on the head, praising their lack of exposure to quinoa or Thai food — both of which can be found in food courts all across the country. Sorry, but there are no country bumpkins in modern America. Most of us, in all walks of life, have a pretty good sense of the full range of things our culture offers, even if too many can’t afford to participate in some of it. You might even say that the only segment of our society that seems truly unaware of how others live is a certain segment of the commentariat, blinded by its simultaneous romanticization of and contempt for working-class white America.

Krugman’s blog, 8/20/16

August 21, 2016

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.

Krugman’s blog, 8/19/16

August 20, 2016

There was one post yesterday, “Slow Learners:”

Larry Summers has a very nice essay that takes off from a new paper by John Williams at the San Francisco Fed, which is noteworthy because Williams is the highest-placed Fed official yet to suggest that maybe the inflation target should be higher. It’s not a new argument – see, for example, my paper for the ECB in 2014, but seeing it come from a senior official is news.

Yet as Larry says, the paper is still weak and tentative even on monetary policy, to an extent that’s hard to understand:

I am disappointed therefore that Williams is so tentative in his recommendations on monetary policy.  I do understand the pressures on those in office to adhere to norms of prudence in what they say.  But it has been years since the Fed and the markets have been aligned on the future path of rates or since the Fed’s forecasts of future rates have been even close to right.

Furthermore, there’s basically no break with orthodoxy on fiscal policy, despite the evident importance of the liquidity trap, evidence that multipliers are fairly large, and basically zero real borrowing costs.

Yet Williams is at the cutting edge of policy rethinking at the Fed. And in general mainstream thinking about macroeconomic policy has changed remarkably little, remarkably slowly.

You might say that it is always thus. But, you know, it isn’t.

I fairly often find myself comparing the intellectual response to the financial crisis and its aftermath with the response to the emergence of stagflation in the 1970s. I say the 70s, but really stagflation emerged as an issue in 1974, after the first oil shock, and pretty much ended with the Volcker double-dip recession of 1979-82 – a recession whose end implication was that monetary policy continued to work in a fairly Keynesian way. So it was well under a decade of experience; yet it utterly transformed how everyone talked about macroeconomics.

Then came the 2008 crisis. As I’ve written many times, events since that crisis have played out pretty much the way someone who knew their Hicksian IS-LM would have predicted – but that should have been shocking to the many people, both in policy circles and in the economics profession, who dismissed that kind of economics as worthless, proved false, whatever. And the sheer persistence both of depressed economies and of low inflation/interest rates should by now have led to a big rethinking. Depression economics redux has now gone on as long as stagflation did.

Yet rethinking has been glacial at best. People who warned about the coming inflation in 2009 are warning about the coming inflation in 2016. Orthodox fears of budget deficits still dominate a lot of discourse. And the Fed still clings to an inflation target originally devised in the belief that the kind of thing that has happened to our economy would never happen.

I’m not entirely sure why learning has been so slow this time. Part of it, I suspect, is that the anti-Keynesian backlash of the 1970s had a lot of political power, and behind the scenes a lot of money, behind it – which influenced even academics, whether they realized it or not. And these days that same power and money is deployed against any rethinking.

Whatever the explanation, however, it’s taking a painfully long time for serious policy discussion to arrive at a point that should have been obvious years ago.

Krugman’s blog, 8/15/16

August 16, 2016

There were two posts yesterday.  The first was “Lies, Lying Liars, and Donald Trump,” and the second was “Abenomics and the Single Arrow.”  Here’s “Lies, Lying Liars, and Donald Trump:”

So, there’s a new conservative take on who’s to blame for Donald Trump — and the answer, it turns out, is liberal commentators, and me in particular. Yep, by denouncing the dishonesty of people like Mitt Romney, I was crying wolf, so that voters paid no attention to warnings about Trump.

Actually, even if you leave aside the substance, this is bizarre. Do you really think that the fraction of the Republican primary electorate that selected Trump cares what New York Times columnists, me in particular, have to say — that they would have been warned off if only I had been nicer to establishment Republicans? That doesn’t even rise to the level of a joke.

But anyway, let’s talk about what I said about Romney. (By the way, I don’t think I referred to him as a “charlatan” — I used that word to refer to supply-side economists, because that’s what Greg Mankiw, who was advising his campaign, called them.) Here’s a key passage:

Every one of the Romney campaign’s major themes, from the attacks on President Obama for going around the world apologizing for America (he didn’t), to the insistence that Romneycare and Obamacare are very different (they’re virtually identical), to the claim that Mr. Obama has lost millions of jobs (which is only true if you count the first few months of his administration, before any of his policies had taken effect), is either an outright falsehood or deeply deceptive. Why the nonstop mendacity?

Is there anything wrong with that passage? The “apology tour” thing was a constant refrain, even though Politifact declared it pants on fire. So were the Romneycare not Obamacare and job loss things, which were equally false. So what is the assertion here? That I should not have called Romney out on lies, because that would undermine my authority when a much bigger liar came along?

How about a different hypothesis: the foundations for Trumpism were laid in part by conservatives who made dishonesty about policy a routine part of Republican politics, and also both-sides-do-it journalists who enabled that culture of lying. This left the Republican establishment helpless in the fact of someone who lied as much in a day as they did in a week, because they couldn’t credibly make the case that policy dishonesty was disqualifying.

Actually, I don’t fully believe in this hypothesis either; mainly, Trumpism is the GOP’s id triumphing over its weak superego, which was probably destined to happen regardless. But it’s a lot more plausible than blaming little old me.

And now here’s “Abenomics and the Single Arrow:”

Some disappointing numbers on Japanese GDP, and the usual suspects are out there denouncing Abenomics and calling for structural reform, the universal elixir. And the evidence that structural reform is the answer is …

What I believe to be the real lesson of Abenomics so far is the limits of monetary policy. There were supposed to be three arrows — monetary policy, fiscal expansion, and, yes, structural reform. But really only the monetary arrow was fired. Here’s the IMF estimate of the structural primary balance, a rough measure of the demand effect of fiscal policy (with bigger deficits meaning more stimulus):

Overall, fiscal policy in Japan has actually gotten tighter, not looser, since Abenomics began, mainly thanks to the consumption tax hike; other measures didn’t offset this much.

So all the weight rested on unconventional monetary policy, which did succeed in depressing the yen and pushing up stocks, but hasn’t been enough to generate a convincing boom or rise in inflation.

And that appears to not be enough, just as the ECB’s actions haven’t been enough without fiscal support. Never mind the third arrow: what we need is the second.

Krugman’s blog, 8/12/16

August 13, 2016

There was one post yesterday, “The State Of Macro Is Sad (Wonkish):”

Olivier Blanchard has a characteristically informed, lucid essay on the role of DSGE models in macroeconomics, in which he accurately describes the problems with these models but – again characteristically – tries to make peace with both sides, calling for reform of this dominant paradigm rather than tossing the whole thing. I understand his motivations. But what strikes me is just how sad a portrait he offers of the state of macroeconomic theory.

Here’s how I would approach the issue: by asking how we know that a modeling approach is truly useful. The answer, I’d suggest, is that we look for surprising successful predictions. General relativity got its big boost when light did, in fact, bend as predicted. The theory of a natural rate of unemployment got a big boost when the Phillips curve turned into clockwise spirals, as predicted, during the stagflation of the 1970s.

So has there been anything like that in recent years? Yes: economists who knew and still took seriously good old-fashioned Hicksian IS-LM type analysis made some strong predictions after the financial crisis that were very much at odds with what lay commentators, and quite a few economists, were saying. They – OK, we – declared that with interest rates near zero massive increases in the monetary base would not cause high inflation, that large budget deficits would not drive interest rates up or crowd out private investment, and that fiscal multipliers would be positive, in fact more than one, and would be considerably larger than estimates based on non-liquidity-trap episodes suggested.

And all of that came to pass. Those of us who knew our Hicks, directly or indirectly, seem to have had a real advantage over those who didn’t.

Can you say anything comparable about DSGE? Were there any interesting predictions from DSGE models that were validated by events? If there were, I’m not aware of it.

Yet even while failing to offer any measurable gains in insight, DSGE had the effect of crowding out the stuff that actually did work. Olivier writes:

I have found, for example, that I could often, as a discussant, summarize the findings of a DSGE paper in a simple graph. I had learned something from the formal model, but I was able (and allowed as the discussant) to present the basic insight more simply than the author of the paper. The DSGE and the ad hoc models were complements, not substitutes.

Um, no – he notes that he was allowed to present the basic insight more simply only because he was the discussant, but that the author of the paper wasn’t allowed to do the same thing. That’s DSGE substituting for, in fact, preventing the ad hoc approach. And most macro papers aren’t published along with insightful discussions by Olivier Blanchard! There is a real loss and cost here.

So what is the gain from this style of modeling? Olivier offers some awfully weak tea:

DSGE models can fulfill an important need in macroeconomics, that of offering a core structure around which to build and organize discussions.

Really? That’s the point of a paradigm that has taken over the field? It sounds, by the way, exactly like the defenses I heard of academic Marxism when I was young: never mind whether it’s right, it provides a framework.

Now, I don’t know how to reform all of this. There is a huge amount of sunk intellectual capital in this modeling approach. But at the very least we should admit to ourselves how very sad the whole story has become.

Krugman’s blog, 8/9/16

August 10, 2016

There was one post yesterday, “Murky Macroeconomics:”

With the result of the presidential election looking relatively clear — I know, chickens not hatched and all that, but, you know, polls have actually been fairly accurate — I’m thinking more about economics. And I realized something not too flattering about myself: I’m feeling nostalgic for 2011 or so.

Why? It was, of course, a terrible time for much of the world, and especially for anyone without a job. But for someone like me, an economist with secure personal finances, it was a time of wonderful intellectual clarity. Liquidity-trap macroeconomics — which I didn’t invent, but did play a role in bringing back into the mainstream — had become the story of the day. And the basic message of the models — that everything changes when you hit the zero lower bound — was being overwhelmingly confirmed by experience.

The thing is, it was all beautifully hard-edged: a crisp boundary at zero, a sharp change in the impact of monetary and fiscal policy when you hit that boundary. And the predictions we made came out consistently right.

But now things have gotten a bit, well, murky.

The zero lower bound is not, it turns out, quite as hard a boundary as we thought. True, there are limits — I’d be surprised if any central bank is willing to go much if at all below minus one percent — but it turns out to be a sort of a fuzzy no-man’s-land rather than a line that cannot be crossed.

More important, probably, is the fact that two of the major advanced economies — the US and, believe it or not, Japan — are arguably quite close to full employment. We don’t know how close, because we don’t know how much pent-up labor supply is still waiting on the sidelines. But you can no longer argue that supply limits are no longer relevant.

Correspondingly, you can also no longer argue with confidence that there can be no crowding out, because the Fed won’t raise rates. You can argue that it shouldn’t — and I would — but we are maybe, possibly, on our way out of the liquidity trap.

So we’re not in the simple, depressed-economy world of 2011 anymore. But here’s the thing: we’re not in what we used to call a normal macroeconomic situation either. Maybe we’re close to full employment, but maybe not, and that’s with near-zero interest rates; also, it’s all too easy to imagine adverse shocks in the near future, and not at all clear how the Fed could or would respond. We are, if you like, half-out of the liquidity trap, with one foot on dry land — but the other foot is still hanging over the edge, and it wouldn’t take much to topple us right back in.

What I would argue is that in this murky, fragile situation we should be conducting policy largely as if we were still in the trap — because we badly need to get both feet firmly on dry land with some distance between us and the quicksand. (And if I’m mixing metaphors — am I? — never mind. Throw the jackboot into the melting pot!) But it’s not the crystalline case we used to be able to make.

Still, we need to deal with this murky situation right, which means embracing the uncertainty as part of the argument. Make murkiness great again!

Krugman’s blog, 8/7/16

August 8, 2016

There was one post yesterday, “Prudential Macro Policy:”

A few years ago, it was easy to say what U.S. monetary and fiscal policy should be doing. The economy was still obviously depressed, so the indicated demand policy was pedal to the metal all the way – no need to worry about inflation, no reason to believe that deficit spending would cause any crowding out (in fact it would almost surely crowd in private investment, because such investment depends on demand.)

It’s true that the right kept warning about a debased dollar, while the Very Serious People were obsessed with debt and deficits, so that in practice we didn’t do the obvious. But it was obvious.

Now, however, we’re arguably not too far from full employment. No inflation problem is visible yet, but it’s not crazy to suggest that inflation might go above the Fed’s target in the not-too-distant future. So has the macro case for strongly stimulative policy gone away?

We’ve had an extensive discussion of this question when it comes to monetary policy, in which uncertainty plays the central role. Maybe we’re at or close to full employment, and will continue in that direction; but maybe not, either because there’s more slack than we think or because adverse shocks will send the economy down again. This means that there’s a risk of getting it wrong in either direction – not raising rates soon enough to head off some rise in inflation, on one side, versus raising them too soon on the other.

And the decisive argument, it seems to me and others – although not, alas, to the Fed – is that these risks are asymmetric. Waiting too long risks embarrassment and some cost of wringing out the extra inflation, but moving too soon risks long-term stagnation. Wait until you see the whites of inflation’s eyes! (I coined that phrase, by the way.)

But what about fiscal policy? I found myself trying to clarify my thoughts here in aid of tomorrow’s column. And while I’m sure I’m not the first to say this, a similar argument applies. Think in particular about infrastructure investment, which takes a long time to get going.

Suppose we were to launch a program of deficit-financed public investment now, which would play out over the next few years. The truth is that we don’t know what the macro environment would be when the spending took place. We might be more or less at full employment, which means that the spending would cause higher interest rates and crowd out some private investment. But we also might be in a depressed state, either because of a slump in some part of domestic demand or because we’re importing secular stagnation from abroad, in which case fiscal stimulus would be just what the doctor ordered.

The point is that these are, again, asymmetric risks. A little crowding out wouldn’t kill us, given how badly we need infrastructure investment. On the other hand, if we do slide back into a liquidity trap we would be badly hurt by not having the public investment we could have had, helping to prop up demand as well as serving other purposes.

Or to put it another way, given where we are in the macro situation public investment, in addition to its usual benefits, would provide valuable insurance against the all too possible return of the zero lower bound. It’s not quite as slam-dunk a case as it was in, say, 2013, but it’s still very strong. It’s still time to borrow and spend.

Krugman’s blog, 8/2/16

August 3, 2016

There was one post yesterday, “The Unbundled City:”

I want to indulge myself a bit, talking about today’s interesting article in the Times about corporate headquarters moving back to cities and how it relates to an old discussion in one of my home fields, economic geography.

Nelson Schwartz’s piece offers a menu of reasons why firms are moving back from suburban campuses to center cities, but this passage, I think, gets at the essence:

“Part of it is that cities are more attractive places to live than they were 30 years ago and are more willing to provide tax incentives, and young people want to be there,” said David J. Collis, who teaches corporate strategy at Harvard Business School.

“But the trend also represents the deconstruction and disaggregation of the traditional corporate headquarters,” he explained. “The executive suite might be downtown, but you could have the back office and administrative functions in Colorado, the finance guys in Switzerland and the tax team in the U.K.”

OK, this goes back to a discussion identified with Ed Glaeser, way back: how would the rise of the Internet affect urbanization?

At the time (20 years ago), many people were suggesting that big urban centers would decline even further, because anyone with a modem could now do white-collar work from the middle of the Texas panhandle, or something. But Glaeser and Gaspar argued that the effect could work the other way, that online contact would increase the demand for meetings in meatspace, and enhance cities.

I think I also argued – though I don’t know if I ever wrote it down! – that information technology would make it easier for people in dense metro centers to provide services to people in remote locations, also enhancing urban centers.

What we’re seeing here, I’d argue, is a special case of or at least a close relative to that latter argument. In today’s world, core headquarters functions – the stuff done by top executives and highly paid experts – can be unbundled from the more mundane operations of a company. These high-end functions are also the ones that benefit most from the agglomeration economies of a big city; not to mention the amenities such a city offers to people whose salaries are enough to let them afford decent housing despite high prices.

Meanwhile, it’s no longer necessary to have all the back-office operations in the same place, requiring that a lot of less-well-paid workers deal with high rents even as they suffer on the long subway ride in from Queens.

So what we’re getting is remote servicing of “customers” who in this case are the other pieces of what was formerly a physically united headquarters.

This is good for urban economies, although it does reinforce the tendency of urban centers to become playgrounds for the very affluent.

Krugman’s blog, 7/26/16

July 27, 2016

There was one post yesterday, “Pax Trumpiana:”

With everything else going on, it may be hard to stay with the evolving Trump/Putin story. But it’s really crucial. I don’t think Trump is literally an agent of the Kremlin; instead, he’s someone Putin is aiding because he knows Trump is close to, probably financially entangled with friendly oligarchs. And equally important, Putin knows that Trump’s combination of ignorance and greed would quickly undermine the Western alliance: already we have, incredibly, a presidential candidate essentially proposing that we turn NATO into a protection racket, in which countries get defended only if they pay up.

All of this is, as it turns out, dovetailing with my bedtime reading.

I’m a huge fan of Adrian Goldsworthy’s histories, and I have a galley of his new opus, Pax Romana. Great fun as usual, plus lots of detail.

At the risk of doing a disservice to the book’s subtleties, however, let me summarize my take so far: Rome didn’t set out to bring peace and stability to the known world. Instead, it conquered for greed and glory, and under the Republic showed very little interest in anything except extracting tribute from defeated powers. This didn’t work out well, aside from the fact that the wealth and slaves brought back to Italy basically destroyed the Republic. (Bribery by foreign potentates was also a serious problem.) It also meant that life in the Mediterranean basin if anything became less secure, because Rome didn’t provide the public goods, notably policing pirates, that Hellenistic powers had previously supplied.

Only in the last years of the Republic and then under the principate did Rome really assume the role of providing security throughout its domain. It did this out of self-interest; nonetheless, it was a really good thing and eventually became something of a value as well as a pragmatic strategy.

America is, one hopes, not ancient Rome; we aspired to universal values from the beginning, and the Pax Americana, while far from being perfect or even free from some evil, has surely been the most benign great-power domination in history. Still, there is some parallel between how we’ve run much of the world and what the Romans learned to do.

But Trump doesn’t care about any of that — he basically wants America to behave like Rome at its worst, to become the predatory power of Lucullus and Sulla.

And all those ultra-patriotic Republicans are cheering him on.

Krugman’s blog 7/22/16

July 23, 2016

There was one post yesterday, “Will Fear Strike Out?”:

If you want to feel good about the state of America, you could do a lot worse than what I did this morning: take a run in Riverside Park. There are people of all ages, and, yes, all races exercising, strolling hand in hand, playing with their dogs, kicking soccer balls and throwing Frisbees. There are a few homeless people, but the overall atmosphere is friendly – New Yorkers tend to be rushed, but they’re not nasty – and, well, nice.

Yes, the Upper West Side is affluent. But still, I’ve seen New York over the decades, and it has never been as pleasant, as safe in feel, as it is now. And this is the big bad city!

The point is that lived experience confirms what the statistics say: crime hasn’t been lower, society hasn’t been safer, in generations. Which, of course, leads us to the Trump gambit from last night. Can he raise 1968-type fears in a country that looks, feels, and is nothing like it was back then?

I wish I were sure that he can’t. A lot of Republican-leaning voters apparently believe that the economy is terrible in the teeth of their own experience – that the pretty good job market they see is a local aberration. And “crime” may not really mean “crime” – it may just be code for “brown people.”

My guess is that it won’t work, if only because the Democratic coalition is fundamentally bigger than the Republican coalition, and Trump will be an excellent get-out-the-vote motivator. But a little certainty would be very welcome.


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