Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 3/27/15

March 28, 2015

There were two posts yesterday, a bit out of order.  The first post was “Friday Night Music: The Lone Bellow, Watch Over Us:”

Yes, I am aware that it’s Friday morning. But I have meetings followed by travel, and probably won’t be able to blog later. Normal service will resume tomorrow.

Meanwhile, I went to see TLB at the Bowery Ballroom Wednesday night:

And it was even better than I expected — you can watch performance videos, but (as with most of the bands I love!) they don’t capture what it’s really like in the room, with the audience very much part of the show. When they did this song, the person standing next to me (it’s all standing, preferably with beer in hand) burst out, “This is surreal — they can do anything!”

Yesterday’s second post was “Hidden Healthcare Horrors:”

One of the odder subplots of the health reform saga has been the almost pathetic efforts of Republicans to come up with Obamacare horror stories. You might think that given the complexity of the law and the almost unlimited resources of the propaganda machine, they’d be able to come up with someone to serve as the poster child of the law’s terrible effects on innocent Americans. As far as I know, however, we have yet to see a single credible example — all the characters featured in Koch brothers ads or GOP speeches have turned out to be potential beneficiaries of the Affordable Care Act, if only they were willing to look at their actual options.

So Cathy McMorris Rodgers went on Facebook to ask for Obamacare horror stories — and instead got an avalanche of testimonials from people who got essential insurance and care thanks to the ACA.

Why can’t the GOP find the horror stories it knows, just knows, must be out there? Matthew Yglesias gets at most of it by noting that Obamacare does, in fact, redistribute from the few to the many:

[O]ne of the main things it does is raise taxes rather dramatically on a pretty small number of high-income people in order to give subsidized health insurance policies to a substantially larger number of low-income people. Indeed, this is one of the main things Republicans don’t like about it!

But there’s a bit more to the story. Millionaires paying higher taxes aren’t the only people hurt, at least slightly, by the law. If you are a young. healthy person (especially if you’re male), living in a state that didn’t have community rating pre-ACA, you may have had a cheap policy that went up in price once the law went into effect; and if you’re affluent as well, you don’t receive subsidies. So there are victims out there.

The problem for the GOP is that they’re the wrong kind of victims. What Republicans want are struggling, salt of the earth regular Americans, preferably older and with expensive medical conditions — not healthy, well-paid guys in their 20s. But the profile of the ideal Obamacare victim matches, pretty much exactly, the profile of the kind of person Obamacare was designed to help.

And the inability of the GOP to come up with true horror stories is, in its own way, a demonstration that the law is working as intended.

Krugman’s blog, 3/25/15

March 26, 2015

There were three posts yesterday.  The first was “Anti-Keynesian Delusions:”

I forgot to congratulate Mark Thoma on his tenth blogoversary, so let me do that now. It’s hard to imagine what current economic debate would look like without the incredible job Mark does in assembling and discussing the most important new work, every day; for sure it would be vastly impoverished. Live long and prosper, Mark.

Today Mark includes a link to one of his own columns, a characteristically polite and cool-headed response to the latest salvo from David K. Levine. Brad DeLong has also weighed in, less politely.

I’d like to weigh in with a more general piece of impoliteness, and note a strong empirical regularity in this whole area. Namely, whenever someone steps up to declare that Keynesian economics is logically and empirically flawed, has been proved wrong and refuted, you know what comes next: a series of logical and empirical howlers — crude errors of reasoning, assertions of fact that can be checked and rejected in a minute or two.

Levine doesn’t disappoint. Right at the beginning of the example he claims refutes Keynesian thinking, he says,

Now suppose that the phone guy suddenly decides he doesn’t like tattoos enough to be bothered building a phone.

OK, stop right there. That’s an adverse supply shock, and no Keynesian claims that demand-side policies can cure the economy from the effects of such shocks. If you have a harvest failure, deficit spending can’t put the crops back in the fields. But that’s not what happened to the world economy in 2008, or in 1930; productive capacity was unimpaired, as was the willingness to work, so what we were looking at was something quite different — a demand shock, according to most economists, and everything we’ve seen is consistent with this view.

Actually, it’s even funnier than that: as Nick Rowe points out, Levine has in effect made phones the medium of exchange, so that he’s actually modeling something like a contractionary monetary policy!

And by the way: if you want a simple, homely example of how demand shocks can happen and cause unemployment, there is the baby-sitting coop.

So it’s the usual.

Meanwhile, on the empirical side: Anti-Keynesians like Levine are actually anti-monetarists too, although they may not realize it; their whole beef is with the idea that demand shortfalls can ever be a problem, and that pumping up demand in any way, monetary or fiscal, can ever be helpful. And they invariably live under a strange delusion: that the empirical evidence supports their position. This was never really true, and in fact the opposite has been the case for more than 30 years.

I could give you a lot of direct evidence, but let me instead just cite a guy named Chris Sims, who I think got some kind of prize for statistical work on economic fluctuations. Here’s his prize lecture, in which he describes his results:

The effects of monetary policy identified this way were quite plausible: a monetary contraction raised interest rates, reduced output and investment, reduced the money stock, and slowly decreased prices … This pattern of results turned out to be robust in a great deal of subse- quent research by others that considered data from other countries and time periods and used a variety of other approaches

Here’s how I see it: by any normal set of intellectual criteria, this debate should have been over 25 years ago. The evidence that monetary shocks have real effects was and is overwhelming, and it’s very difficult to write down a model in which this is true but in which fiscal policy is never effective at least on some occasions. The spectacular success of liquidity-trap predictions these past 6 years is just icing on the cake.

To understand why anti-Keynesian delusions persist, then, we need to turn to other social sciences, and try to make sense of the sociological forces that keep these delusions alive.

Yesterday’s second post was “Eurobounce:”

A lot of the recent data coming in show a substantial acceleration in European growth. And you know what will be coming next: claims that this (a) vindicates austerity and (b) shows that there is no reason to worry about Japanification.

Time, then, for some prophylaxis.

First, on austerity: one of the truly amazing and depressing things about the whole fiscal policy debate is the apparent inability of large numbers of supposedly sophisticated commentators to appreciate the distinction between levels and rates of change. Maybe it would help to note that the US economy grew 10.8 percent — that’s right, 10.8 percent — in 1934, but nobody would claim that the Great Depression was over? Nah, it won’t help at all.

Still, for what it’s worth: think of Keynesian economics as asserting that

GDP = multiplier*government spending + other stuff

Then if we’re looking at growth

Change in GDP = multiplier*Change in government spending + change in other stuff

Now look at euro area fiscal policy, as estimated by the IMF:

There was a major tightening after the Greek crisis struck and Germany reverted to type, but there hasn’t been much further tightening recently. So there’s nothing especially troubling about a return to growth.

What about Japanification? There seems to be a widespread misperception that Japan spent its lost decade in a continual downward spiral, with never an uptick. Not so. There was, in fact, a return to growth in the mid-1990s that lasted until contractionary fiscal policy and a banking crisis led to recession, and another period of growth under Koizumi that, however, wasn’t enough to get Japan out of deflation:

You really don’t want to take a short-run rise in growth as a sign that secular stagnation is no longer a worry.

Right now, I’d argue that Europe is benefiting a lot from the weaker euro, which is coinciding with a de facto, if unacknowledged, pause in austerity. But the downdrafts — shrinking working-age population, a single currency in a distinctly non-optimum currency area, and the intellectual rigidity of too many policymakers — remain.

The last post yesterday was “Hook, Line, and Thinker (Trivial):”

Apropos of nothing much, the British magazine Prospect has done a poll to identify the world’s leading thinkers. Some very odd characters there.

A small complaint: if you’re going to use photos at all, maybe use photos from the past couple of years, not way back when?

Krugman’s blog, 3/24/15

March 25, 2015

There was one post yesterday, “Liberals, Conservatives, and Jobs:”

Just about everything I write evokes vituperative reactions from the usual suspects, but never so much as when I point out awkward facts. So there was a lot of mud-slinging when I pointed out last summer that California’s economy — which conservatives said was doomed by tax increases and generally liberal policies — was in fact experiencing an impressive recovery.

Well, the story continues:

To be fair, California has a larger labor force than Texas, so its rate of job growth is still somewhat lower. Still, this wasn’t supposed to happen.

Why does this sort of thing bother conservatives so much? Well, it’s an essential part of their belief structure that they have a secret sauce that lets them deliver job growth that liberals can’t. As Rand Paul declared,

When is the last time in our country we created millions of jobs? It was under Ronald Reagan …


If creating “millions” of jobs means adding 2 million or more in a given year, then we did that in three of Jimmy Carter’s four years in office, and 13 times since Reagan left the White House — 8 times under Bill Clinton, twice under George W. Bush, and three times so far under Barack Obama. Actually, the only times we haven’t added millions of jobs under Democrats have been in the aftermath of severe shocks — the oil shock of 1979 and the financial crisis of 2008.

Am I claiming that Democratic presidents were responsible for all this job creation? No, not at all, nor do I need to. The point, instead, is that their policies didn’t prevent a lot of employment growth. That is, what you learn from both national experience and the California story is that you can raise taxes on the rich and expand access to health care without killing the economy.

Republicans, by contrast, need to claim that Reaganomics produced all the job growth of the 80s, just as they used to claim that Bush’s “ownership society” was responsible for any and all good news in the 2000s. That’s why they’re desperately trying to claim that the economic recovery now underway is an illusion.

They can’t handle the truth.

Krugman’s blog, 3/23/15

March 24, 2015

There were two posts yesterday.  The first was “The Loneliness of the Not-Crazy Conservative:”

A few minutes before class, and I’m thinking about the plight of not-crazy conservatives. I have macroeconomics in mind at the moment, but it’s not a unique issue.

If you think about policy in general, it involves two kinds of decisions: values and models, or what you want and what you believe. There aren’t totally independent, but people should be able to make a distinction. And in that space there is room for legitimate argument. You can, for example, want a strong welfare state that does a lot of redistribution, or not; meanwhile, there is a range of defensible views about, say, the effectiveness of monetary policy or the incentive effects of taxes.

But not all views about how the world works are defensible. And here’s the thing: in modern US politics, trying to side with people who want a smaller welfare state means siding with people who insist on believing things that aren’t true. Think of it as a matrix:

There have been people on the left who make claims about how the economy works that are radically at odds with the evidence — but it’s hard to find such people in America these days, and they certainly have no influence on the Democratic Party. On the other side, there are “reformicons” who try to more or less talk sense about the economy (more or less because market monetarism has big problems); but they are a tiny group of intellectuals with little influence on a Republican Party that gets its economics from Art Laffer and Ayn Rand.

The reformicons like to imagine that one day they’ll win over the party that reflects their values, and in the long run maybe that will happen. But for now, and my guess is for decades to come, they have no political home — unless they wake up and realize that they aren’t actually Republicans in the modern sense.

The second post yesterday was “Charlatans, Cranks, and Cooling:”

Branko Milanovic notes Lee Kwan Yew’s explanation of the success of Singapore and other Asian economies; partly Confucian culture, partly air conditioning. If you’ve ever tried to walk around Singapore, you know whereof he speaks.

The same factor plays a major role in explaining differential US regional growth, and thereby hangs a tale.

The rise of the US sunbelt can be understood largely as a response to the emergence of widespread air conditioning, which made places that are warm in the winter attractive despite humid, muggy summers. It’s a gradual, long-drawn-out response, because location decisions have a lot of inertia; few people would choose de novo to live in the old industrial towns of upstate New York, but the existing housing stock and the fact that people have family and social networks prevent quick abandonment. So to this day temperature is a good predictor of state population growth. I’ve taken the NOAA data and divided states into three groups by average temperature: Group I is colder than Rhode Island, Group III warmer than California:

Who’s in Group III? The full list:

South Carolina

These are places where summer would be really oppressive without air conditioning. (Actually, I find it oppressive with — in Texas, in particular, indoor spaces are freezing. But that’s another story.)

Now, these states have several things in common besides high temperatures. They’re all very conservative. And all of them that were states before the Civil War were slave states. These commonalities are, of course, all interrelated. Hot states had slaves because they were suitable for planation agriculture; and today’s red states are, pretty much, the slave states of 150 years ago.

Now, all of this raises some interesting problems for the assessment of economic policy. Because they’re politically conservative, hot states tend to have low minimum wages and low taxes on rich people. And someone who is careless, cynical, or both, could easily take the faster growth of these states as evidence that conservative economic policies work. That is, charlatans and cranks can, all too easily, end up claiming credit for economic and demographic trends that are actually the result of air conditioning.

Well, FSM knows that Georgia and South Carolina (states I’m familiar with) are chock full of cranks, charlatans, and lunatics.  Which is not cool at all…

Krugman’s blog, 3/21/15 and 3/22/15

March 23, 2015

There were two posts on Saturday and one yesterday.  The first post on Saturday was “A Tough Business:”

The glamorous lifeThe glamorous life

Here’s a writeup of the panel that brought me to SXSW. As you might expect, the Butler brothers from Arcade Fire are really well-spoken and interesting; basically, I’m pretty sure they could do my job, whereas there’s no way I could do theirs.

There was also an interesting discussion with Tatiana Simonian of Nielsen about the role of data-driven decisions by record companies. She and I agreed that while the data on what audiences are drawn to are highly imperfect, the gut feelings of executives are often worse, so that on balance the data make for better music. My parallel is with the news business; the most-emailed list is a deeply flawed metric, but still a very useful corrective to the inside-baseball instincts of long-time newspaper people.

I was glad to have direct confirmation of what I said, drawing on work by Marie Connolly and Alan Krueger: for the artists, it has always been about live performance, not record royalties. Yes, there have been a few exceptions — the Beatles, Michael Jackson — but it’s the norm. One questioner from the audience raised doubts, but Will Butler silenced them, telling us that AF makes about as much from one European festival as it does in all royalties from a record.

And boy, is music a tough life. I took the picture above on my phone. It’s Alvvays, who released their first album to critical acclaim, totally filled their venues at SXSW (this was my second try — the first time I couldn’t get in). And there they are, crawling around on the stage trying to get their cables plugged into the right places.

I think about how easy I had it — my very first teaching job paid the equivalent of about $60,000 in today’s dollars — and am deeply thankful that so many wonderful talents love music enough to stick it out and enrich our lives.

Saturday’s second post was “Democratic Booms:”

Everyone in the Republican Party knows that Reagan presided over an economy that has never been equalled, before or since. When I was on TV with Rand Paul, he confidently declared

When is the last time in our country we created millions of jobs? It was under Ronald Reagan …

Of course, it’s not true:

There was an even bigger job boom under Clinton than under Reagan, and Obama has now presided over three years of fairly rapid job growth, with the most recent year the fastest since the 90s.

But does this say anything about the presidents in question? Both the Reagan expansion and the Clinton expansion had much more to do with Federal Reserve policy than anything coming from the White House, and Obama’s macroeconomic policy has been hamstrung by GOP opposition almost from the beginning. There are presidents, and sometimes there are job booms when they are president, but the booms aren’t their doing.

But it is nonetheless the case that those Democratic booms vindicate liberal beliefs, while the Reagan boom does not, in any way, validate conservative ideology? Why? Because conservatives insisted that the Clinton and Obama booms were impossible.

I’m old enough to remember the cries of doom when Clinton pushed through an increase in top tax rates. If you were reading the WSJ editorial page, or Forbes, or listening to Newt Gingrich, you knew that it was time to sell all your stocks and wait for the depression.

And Obama, of course, was bringing on hyperinflationary collapse with his health reform and tax hikes at the top.

Needless to say, none of it happened; what the Democratic booms show is that you can strengthen the safety net and raise taxes on the wealthy without causing economic disaster.

But didn’t liberals make similar predictions of Reaganite disaster? Actually, no. As I’ve pointed out in the past, what happened under Reagan — tight money brought on a severe recession, but the economy recovered once money was loosened again, and the intervening period of slack brought inflation down — was exactly what the textbooks predicted.

If politics made any sense, Democrats would be celebrating Clinton in the way Republicans celebrate the blessed Ronald, and they’d be hailing Obama as Saint Bill’s second coming. Meanwhile Republicans would be fairly diffident about a pretty good job but not all that exceptional expansion that was mainly Paul Volcker’s doing, and was a long time ago.

Yesterday’s post was “Mid-Atlantic Currencies:”

This economy has its own currency:

This economy does not:

You got a problem with that?

The really amazing thing is that Iceland has been very well served by its independent currency, which spared it the immense cost of internal devaluation. I am not calling for creation of a Mercer County currency, although if it ever happens, I suggest naming it either the Plumdollar or the Evanovich. But it’s an interesting exercise in optimum currency area theory to ask why.

Krugman’s blog, 3/20/15

March 21, 2015

There were three posts yesterday.  The first was “Why Is British Economic Discourse So Bad?”:

What would Alan Simpson say?
What would Alan Simpson say?

Still at SXSW, which accounts for lack of blog posts — I mean, seize the day and all that. Not much action this morning, except a discussion with Snoop Dogg, which I’m not going to; but whenever I think about Mr. Dogg, I think about Alan Simpson. Which brings me to the subject of this post.

BowlesSimpsonism — obsession with the deficit as the key economic problem, despite incredibly low borrowing costs by historical standards (and the inability of the Eek! Greece! crowd to come up with any plausible story about how a Greek-style crisis can happen to a country with debts in its own currency) — has been fading fast from the U.S. political scene. I wouldn’t go so far as to say that we have a rational macroeconomic discourse, with charlatans and cranks completely dominating half the political spectrum, but our Very Serious People have moved on, and may even feel a bit chastened.

As Simon Wren-Lewis has been documenting, however, British discourse seems stuck where ours was in 2011. Britain’s VSPs, very much including the news media, take it as axiomatic that the deficit is the dominant issue; terrible growth over the past 5 years (only slightly redeemed by an acceleration at the end of the period) and low productivity don’t seem to rate at all.

Yet objectively the deficit should have faded even more as an issue in Britain than it has in the US. Here are IMF estimates of the two countries’ structural (i.e., full employment) budget balances:

International Monetary Fund

You can see a couple of things here. One is that the acceleration of British growth, far from vindicating austerity, came just when there was a pause in austerity, a slowdown in the pace of tightening. As I’ve said in the past, if you have been repeatedly hitting yourself in the head with a baseball bat, you’ll feel much better when you stop; this doesn’t mean that hitting yourself in the head was a good idea.

The other thing you can see is that Britain has even less reason than the US to worry about deficits right now. So why the difference in VSP beliefs?

I’m actually not sure. One possibility is that the very harshness of US partisanship makes the ulterior motives of austerians harder to ignore. Another is that greater involvement of US academics in public debate has given the broadly Keynesian consensus of the profession — and yes, it is a consensus — greater traction.

Anyway, the sad result is that Britain is going into an election with bad, foolish economics not simply getting a hearing, but being presented by the news media as obvious, unchallengeable truth.

The second post yesterday was “The Age of Frozen Certainties:”

The Times has an interesting headline here: Richard Fisher, Often Wrong but Seldom Boring, Leaves the Fed. Because entertainment value is what we want from central bankers, right? I mean, Janet Yellen is such a drag — she just keeps being right about the economy, and that gets old really fast, you know?

OK, never mind. What is remarkable is Fisher’s complete confidence in his own wisdom despite an awesome track record of error. What’s even more remarkable is that his unshaken certainty is the norm among inflationistas and anti-Keynesians in general. So wrong for so long — and the other side has been right, again and again — yet not a hint of self-doubt.

If you want a contrast, consider the stagflation of the 1970s. Anti-Keynesians are triumphant, and cite it to this day as the ultimate empirical argument; and while Keynesians did rally, they took a lot of the critique (too much, in fact) on board.

And here’s the thing: the era of stagflation, at maximum, lasted from November 1973, when the first oil-shock recession began, to November 1982, when expansionary monetary policy worked exactly the way IS-LM analysis said it should. Long before those 9 years were up, we had proclamations that everything demand-side had been refuted by evidence.

Compare and contrast recent events. The Fed dropped rates to zero in December 2008. Since then we have seen a 400 percent expansion in the monetary base with no inflation acceleration; record peacetime deficits with record-low interest rates; huge economic contraction in countries that imposed austerity policies. All predictable and predicted by Keynesians, and utterly at odds with rival doctrines. And the resulting intellectual movement was … zero.

And the work week ended with music, as usual.  Here’s “Friday Night Music: SOAK”:

I saw a lot of great stuff at SWSX — San Fermin, Alvvays, Courtney Barnett, and more. Also ate and drank too much to make up despite some lovely long runs along the river.

But I have to choose one. She’s 18; I don’t think she’d have been allowed in that bar if she weren’t performing. But amazing — and I very much doubt I’ll get this close again:

Here’s one of the songs:


Krugman’s blog, 3/18/15

March 19, 2015

There were two posts yesterday.  The first was “No Business Like Show Business (Personal):”

A light Texas breakfast
A light Texas breakfast

I’m at SXSW; saw my first couple of sets last night. And right away I had a demonstration of why you want to see live performances.

I’ve been following San Fermin for a while, and they had a slot from 10 to 10:40 — which was nearly sabotaged by technical problems. The electricians kept coming on and off stage, while the band waited and waited — I don’t know what the problem was. Time drifted away — it was 10:10, then 10:20, the audience was growing restive, and I felt terrible for the performers, who seemed to be losing their chance to perform.

Then, finally, it was a go — and it was a totally explosive set, which left the band winded and disheveled, and had the audience roaring with enthusiasm.

What a great experience.

Yesterday’s second post was “Modern and Postmodern Recessions:”

As I mentioned yesterday, Romer and Romer have a new paper questioning the claim that recoveries are always slow after financial crises — and certainly slow recovery isn’t inevitable.

But I do think it’s important to realize that this dispute doesn’t invalidate a related point, namely, that the kind of recovery you can expect from a recession depends on the sources of that recession. Way back — before Lehman fell! — I argued that there was a distinction between modern and postmodern recessions. Pre-Great Moderation, recessions were brought on by the Fed, which raised rates to reduce inflation, then loosened the reins, producing a V-shaped recovery. Post-Great Moderation, with inflation low and stable, booms were allowed to run their course, so that recessions came from private-sector overreach — and the Fed had a much harder time engineering recovery. This was especially true after 2007, when we hit the zero sort-of lower bound.

You can see the difference clearly in a simple chart of interest rates and core inflation:

The recessions of 69-70, 73-5, and 81-82 were responses to inflation and the high rates the Fed imposed to fight it; the economy bounced back when the Fed was done. The recessions of 90-91, 2001, and 2007-9 were completely different.

And every time you hear someone claim that Obama failed because he didn’t have a Reaganesque business cycle, consider the comparison of monetary policy:

The Reagan recession involved a housing slump caused by the Fed, with a lot of pent-up demand that surged once the Fed had cut rates by 1000, that’s right, 1000 basis points. The Great Recession involved a housing slump that followed the mother of all bubbles, with a resulting overhang of both houses and debt — and interest rates could only fall a limited distance before hitting zero.

This doesn’t mean that a sustained slump was inevitable; we could have had a strong, sustained fiscal response. But that was prevented by the same people who now blame Obama for the delayed recovery.

Krugman’s blog, 3/17/15

March 18, 2015

There were five posts yesterday, four by him and one guest post.  The first post was “Exchange Rates and Balance Sheet Effects:”

Neil Irwin writes about concerns that a rising dollar will damage developing countries where corporations have borrowed in dollars; as he says, this raises echoes of the Asian crisis of the late 1990s and the Argentine crisis of 2002.

He does seem to go slightly astray at one point, however:

The biggest difference this time around is that private companies, not governments, have incurred debt in a currency not their own.

Actually, this time is not different: the Asian and Argentine crises were also about private-sector debt, with Asian public debt, in particular, quite low before the crisis hit. And a number of economists, myself included, independently developed models of leverage, currency mismatch, and balance sheet effects to make sense of the Asian crisis.

This point matters, I think, for a couple of reasons. On one side, if you paid attention to Asia in 1997-98 you were pre-inoculated against the temptation to fiscalize crisis narratives – the urge to see everything that goes wrong as the result of budget deficits. (This is one reason I reacted to Irwin’s piece; there’s already been a huge effort to retroactively fiscalize the euro crisis, and we need to push back against attempts to do the same to Asia.)

On the other side, I sometimes hear people declaring that until the 2008 crisis struck, economists paid no attention to private debt as a source of economic problems. But everyone who worked on Asia 1998 was very well aware of the problems debt and leverage could create. If we didn’t realize how vulnerable the rise in household debt made America, that was a failure of observation, not a deep conceptual problem.

As I’ve tried to say on a number of occasions, the 2008 crisis came as a surprise but not, at least for me, as a shock – I realized almost immediately that what was happening fitted quite well into existing frameworks. We knew about bank runs; once you realized that something essentially the same as a bank run could happen with repo and other forms of shadow banking, it took about 30 seconds to make sense of the post-Lehman funk. We knew about balance-sheet effects, both from Irving Fisher and from Asia; it wasn’t hard at all to transfer that understanding to the aftermath of the housing bubble.

I mean, I wrote a book titled The Return of Depression Economics in 1999. Not too hard to take on board the fact that it was coming true.

Yesterday’s second post was “Sources of Slow Recovery:”

The other R&R — Christina and David Romer — have an interesting new paper questioning the other Reinhart-Rogoff result, the claim that financial crises consistently lead to deep, sustained slumps. I’m not ready to referee this one, at least not yet. Romer and Romer clearly have done an impressively systematic job of identifying financial distress in an objective way; but I wonder, very tentatively, if they’re looking at the wrong variable. My sense is that the aftermath of credit and housing bubbles is consistently remarkably bad – Alan Taylor and colleagues have been documenting this proposition — and that may not be well captured by reports of credit-market distress.

Still, Romer-Romer have some interesting thoughts about why recovery from the 2008 crisis was so slow. They suggest that hitting the zero lower bound may have been crucial. That’s actually why I was predicting a sluggish recovery well in advance, and in fact well before the Reinhart-Rogoff aftermath paper came out. And then there is the unprecedented fiscal austerity.

However this dispute eventually pans out, one thing should be clear: whether or not sluggish recovery from financial crisis is the norm, this particular episode didn’t have to happen. Better policy could have produced a much faster, stronger return to full employment.

The third post yesterday was “Lone Star State of Mind:”

Will Butler of Arcade Fire [and it’s a different Will Butler! You see, I’m on a panel with the AF Butler brothers Thursday, so I just assumed …] has a somewhat downbeat piece about the corporatization of SXSW. And I have just arrived in Austin to do some investigative reporting on the scene, remaining clearly focused on the socioeconomic issues – that is, aside from the concerts and the parties, which I will of course attend purely for research purposes. The same for my beer consumption.

Prof. Krugman’s last post yesterday was “Self-Justifying Swedes:”

One fundamental principle in the years since the financial crisis, with all the bad judgments and policy missteps we’ve seen, is that nobody ever admits having been wrong about anything. And it turns out that people can not admit error in Swedish, too. Lars Svensson has the details on the Riksbank’s deputy governor Jansson.

The final post yesterday was a guest post by Kim Lane Scheppele titled “Hungary Without Two Thirds:”

A guest post from my Princeton colleague Kim Lane Scheppele, head of the Law and Public Affairs program:

Hungary without Two Thirds

Kim Lane Scheppele
Princeton University
17 March 2015

On 22 February, in a small by-election in a medium-sized Hungarian town, the governing party Fidesz lost its two-thirds parliamentary majority.

The loss of the Fidesz supermajority is a big deal because two thirds is a magic fraction in Hungarian law. With two thirds of the parliamentary seats, a party can change the constitution at will and therefore govern without constitutional constraint. But it’s not just constitutional change that requires a two-thirds vote. Over the last five years, Fidesz built so many required two-thirds supermajorities into so many different laws that it is nearly impossible to govern Hungary on a daily basis without two thirds. And each time it now confronts a two-thirds problem, Fidesz must get the support of someone – or some party – outside its own circle. This is the first political constraint that Fidesz has faced since it came to power in 2010.

What will Fidesz do without two thirds? It only took a little more than a week after the by-election for a tentative answer to emerge. A two-thirds vote appeared on the parliamentary agenda – and passed. Who put Fidesz over the top to get its two thirds? An MP from the far-right party Jobbik. The vote signaled that Fidesz may now be working in effective partnership with a party that Human Rights First has called “the bloody tip of the far-right spear in Europe.”

If this is true, then why hasn’t the European Union immediately launched crippling sanctions as EU member states did when the Austrian government included Jörg Haider’s far-right party in 1999? Because Fidesz learned a lesson from that example. In Austria, the coalition was public. In Hungary, a coalition can be secret.

The constitutional rules in Hungary permit Fidesz to keep its two thirds through strategic absences rather than affirmative votes. For most two-thirds votes, no member of parliament (MP) need visibly cross the aisle to vote affirmatively with the governing party. If an opposition MP is merely missing when a two-thirds vote is taken, Fidesz can still win.

In Hungarian constitutional law, not all two-thirds majorities are created equal. An absolute two-thirds majority requires the affirmative vote of two-thirds of all of the members of parliament. An absolute two-thirds majority is required to amend or rewrite the constitution or to ratify treaty change in the European Union. An absolute two-thirds majority is also required for electing constitutional judges, the president of the Supreme Court, the head of the State Audit Office, the head of the National Judicial Office, the public prosecutor and the ombudsman – or to declare a state of emergency. For Fidesz to gain an absolute two-thirds majority now, someone must to visibly cross the aisle and vote with the governing party.

But it takes only a relative two-thirds majority to do everything else – like amend the especially important “cardinal laws” or fill seats on the electoral commission or the media council. A relative two-thirds majority requires the affirmative vote of two thirds of the members of parliament who are present on that day in the chamber, given a quorum. Fidesz can therefore still win a relative two thirds with the votes of only its own party if all of its MPs are present while any non-Fidesz MP is missing. For the vast majority of two-thirds votes, then, Fidesz does not have to win an affirmative vote from an opposition MP. It only has to procure his absence.

On 3 March, Fidesz faced its first two-thirds challenge since it lost its supermajority. Two key items were on the agenda that day, both bundles of amendments to existing laws. Parts of each bundle were “cardinal” and thus required two-thirds votes while other parts were not and therefore required only a simple majority to pass. The governing party’s tendency to mix different sorts of amendments in the same parliamentary procedure is confusing for everyone, including MPs who have to vote by different majorities on each.

In the first package of amendments, child protection agencies, social security offices, employment centers, land administration agencies, environmental protection offices and more would lose their independent and separate spheres of action and become integrated parts of the regional offices of the central government as of 1 April 2015. The second package of amendments proposed to “enhance public trust in state officials” by requiring public sector workers to disclose to their employers if they are under criminal investigation.

At the time of the vote on both packages, all Fidesz MPs were present, but there was one opposition MP missing: István Apati from Jobbik. The cardinal bits in first package of changes passed, with 131 votes in favor (all Fidesz), and 65 against, with 196 MPs present – gaining the support of 66.8% of those present. This gave Fidesz just barely two thirds (above 66.6%). The cardinal bits in the second package of changes failed because only 130 voted in favor, 44 voted against and 22 (Jobbik MPs) abstained. Because only 66.3% of the MPs present voted for the law, Fidesz failed to clear the two-thirds hurdle by a bare one third of one percent.

What happened in the second vote? Lajos Kosa, a Fidesz stalwart, pressed the wrong button and accidentally voted against the package. His party promptly fined him 100,000 forints (about $343 USD) for having disobeyed a party order to vote along party lines. (Yes, in the Hungarian parliament, some political parties fine their MPs for failing to take direction on parliamentary votes!)

Fidesz castigated Kosa for making a mistake on the second vote. But, they said nothing about how the first package could pass. It gained the required two-thirds vote only because an opposition MP was missing. Had Kosa not erred, the second package would have passed as well.

Jobbik’s party leader, Gábor Vona, claimed to be furious with the missing MP Apati and fined him 100,000 forints for violating party discipline. Vona gave an interview shortly thereafter in which he threatened anyone who might claim that Jobbik was acting in concert with Fidesz on this vote.

But the whole story got curiouser and curiouser when Apati started explaining why he had been absent on that crucial day. He claimed he had to protect his family because he had gotten death threats from a member of a Roma gang. (Jobbik rode to popularity on an anti-Roma platform blaming “Gypsy crime” for many of Hungary’s ills.) While the threat occurred on a Saturday, he reported it to the police only on Monday, which was the day before the parliamentary vote. Journalists who interviewed many people in his town could find no one else who knew about a local “Roma mafia.” So the story just seems strange and conveniently timed.

Does this mean that Fidesz is working under the table with Jobbik? From this one incident, it is hard to say for sure. Jobbik’s leader has been at pains to claim that there is no secret coalition, and yet Vona was himself missing for another parliamentary vote on 15 December 2014 that had the same effect. At that time, Vona’s absence shored up the Fidesz relative two-thirds when a Fidesz MP, Jenő Lasztovicza, was absent due to illness. (He later died – so there will be another by-election in April.) The December vote sailed over the two-thirds hurdle with even more support than necessary because another MP, former Socialist Prime Minister Ferenc Gyurcsány, was missing as well. Fidesz was therefore already able to pass an amendment to a cardinal law (in this case, one that nationalized and regulated tobacco shops) when one of its MPs was dying – before the party definitively lost its two thirds in February’s by-election. In December, the Fidesz victory was made possible by missing one MP to the right and another MP to the left of the governing party.

When Vona’s December absence was noted in the brouhaha over the 3 March vote, he promptly fined himself 100,000 forints to show that he was even-handed about disciplining his party’s members. He then said he would donate the proceeds of this fine to charity, raising questions about whether, under Jobbik party rules, fines issued against MPs who don’t follow party orders go straight into the pocket of the party leader.

The theory that Fidesz is collaborating with Jobbik is not far-fetched, given the record. Since 2010, when Fidesz took office with its two-thirds supermajority, Jobbik has been the only parliamentary party whose MPs have voted with Fidesz on a non-trivial number of occasions. Jobbik supported many of Fidesz’s most controversial laws – for example, the extra taxes on banks, retroactive taxation of public sector severance pay, the elimination of time limits on pretrial detention and the approval of the recent deal with Russia on nuclear plants. Jobbik even backed two of Fidesz’s appointments to the Constitutional Court (Béla Pokol and Imre Juhász).

Not only has Jobbik already voted more often than any other party with Fidesz, but Fidesz has already borrowed many ideas from Jobbik . Before the by-election, Jobbik votes were not needed to get to two thirds and Fidesz did not have to take pages from Jobbik’s platform to get Jobbik’s votes. Jobbik regularly piled votes onto Fidesz initiatives and Fidesz regularly took ideas from Jobbik anyway. A secret collaboration at this point would only take underground what has already occurred in public. Perhaps what we saw on 3 March is a sign that Fidesz and Jobbik are already working together.

But the deniability of a working coalition is crucial to its success. Would the EU sanction the Fidesz government for collaboration with a far-right party when Jobbik MPs are simply missing in action at the time a parliamentary vote is called? Since there are so many reasons to be away from parliament on any particular day – “Roma attacks,” or perhaps a strategic illness, or a well-timed flat tire – missing MPs have plausible deniability that their absence was part of a plan. One can imagine that EU sanctions would dissolve without smoking-gun proof of coordination. In addition, Fidesz and Jobbik have every reason to deny working together in order to maintain their credibility with their own voters.

Jobbik is not the only source of a crucial missing MP. Any MP willing to put personal benefit ahead of party loyalty – or any MP who could be successfully blackmailed – could agree to be absent and allow a relative two-thirds majority to form without him. All Fidesz needs is one opposition MP to disappear on a particular day and the relative two-thirds votes will still sail through. Fidesz may find that it is even simpler to get an individual MP to break from a party than to convince a whole party to collaborate.

Of course, the fact that Fidesz could seek its procured absences elsewhere reduces Jobbik’s bargaining position. So, Vona could be right that there is no permanent coalition. But there may be an opportunistic collaboration on particular issues nonetheless. If Fidesz were really clever, however, it could hide such an opportunistic collaboration by procuring a strategic absence from both left and right on the same day, just to demonstrate its independence. We already saw that voting pattern in December. It would be fascinating to know what has been promised – or threatened – in exchange for absences. Or whether the absences were generated by one of the many perfectly innocent reasons why MPs go missing for crucial votes.

Figuring out what is happening in Hungarian politics from now on will require careful attention to missing persons. We probably will not have to wait long to see the new ways that Fidesz gets its two thirds because amendments to cardinal laws come up surprisingly often in the Hungarian parliament. Cardinal laws were originally only supposed to regulate matters of fundamental constitutional importance, but they now cover so many different subjects that two-thirds votes have become the “new normal” of political life.

The parliamentary records show that Fidesz has needed its supermajority almost every week – and sometimes even every day – that it has governed. In fact, one Hungarian law blog did the count: between September 2014 and January 2015, fully 50 matters before the parliament required two-thirds votes. In the year before that, two-thirds votes were required on 214 occasions. The law on economic stability alone was amended 20 times since its passage in 2011 and, since it is a cardinal law, each vote has required two thirds. (So much for economic stability!)

While Fidesz now claims that the loss of its two-thirds supermajority is not important because revolutionary changes are over and the need for the daily two thirds has passed, the statistics don’t lie. Prime Minister Viktor Orbán’s new constitutional order can’t operate smoothly without its two thirds.

Perhaps the best testament to the continuing importance of two thirds is the legal framework invented for last April’s parliamentary election. Orbán clearly thought that his two-thirds majority was so important that he stopped at almost nothing to keep it. In fact, Orbán actually needed every trick in the book to win his second two-thirds parliament. He also needed a trick that was not in the book. Fidesz won its two-thirds majority in April 2014 only by counting the speaker of the house in that total, and then the party discovered that the rules of parliamentary procedure prevented the speaker from casting a vote. So the Fidesz MPs quickly voted to change the “house rules” of the parliament to allow the speaker’s vote to count. And voilà! Fidesz retained its two thirds!

After February’s by-election, however, Fidesz no longer has its magic fraction. Given the party’s plunging popularity, it may well lose the next by-election in Tapoca on 22 April as well. The loss of two thirds is important, both practically and symbolically. But we will only be able to assess whether Fidesz’s wings are really clipped and whether Orbán has had to depend on strategic partners by closely monitoring every two-thirds vote from now on. If Orbán keeps achieving relative two-thirds majorities with only the votes of his own party, then we should wonder what price was paid for every empty seat in the room. In Hungarian politics now, out of sight should not mean out of mind.

Krugman’s blog, 3/16/15

March 17, 2015

There were two posts yesterday.  The first was “St. Augustine and Secular Stagnation:”

Brad DeLong reminds me of Simon Wren-Lewis’s excellent piece on Eurozone fiscal policy, which emphasizes the extent to which European officials still don’t get the basic macroeconomics of their position. I realized, however, that recent discussion of secular stagnation — which seems like a realistic possibility for Europe, even more so than the US — adds a twist to the story, one that I’m not sure is widely appreciated.

The way to put both the basic argument and the twist is, I think, in terms of the neutral interest rate — the short-term interest rate that would produce full employment. In the aftermath of the financial crisis, this rate was clearly negative, which means — leaving the possibility of modestly negative rates aside — that conventional monetary policy had reached its limits. Most analyses, however, assume that this is a temporary condition. So the expected time path of the neutral rate looks like this:

What does this say about fiscal policy? Well, fiscal austerity in the first part of this figure, when the neutral rate is unattainable, is a terrible idea, even if you have high public debt. Why? Because multipliers are large, so that austerity has a large cost in lost output and unemployment; given hysteresis, it may even make the long-run fiscal situation worse. The appropriate policy during the era of the binding zero lower bound is fiscal stimulus to achieve full employment, and worry about debt later.

I think I was the first to quote St. Augustine here: “Grant me chastity and continence, but not yet.”

Within the euro area, as Simon correctly notes, there’s a question of allocation among countries, which should be decided on the basis of competitive adjustment, not debt burden: the average output gap should be zero, but countries in need of a relative fall in prices should run below potential, those in need of a relative rise run above potential, and fiscal policy should make it so.

But the assumption here is that the neutral rate will eventually rise, so that monetary policy can take over the job of achieving full employment. What if we have doubts about whether that will ever happen?

Well, that’s the secular stagnation question. In fact, I’d define secular stagnation as a situation in which the neutral interest rate is normally, persistently below zero. And this raises a puzzle: If we worry about secular stagnation, should we then say that St. Augustine no longer applies, because better days are never coming?


The way to deal with secular stagnation, if we believe in our models, is to raise the long-run neutral interest rate above zero. If we can do this via structural reform and/or self-financing infrastructure investment, fine. If not, raise the inflation target.

And how do we get to the higher target inflation rate, when monetary policy is having trouble getting traction? Fiscal policy! If you’re really worried about secular stagnation, you should advocate a combination of a raised inflation target and a burst of fiscal stimulus to help the central bank get there.

So the St. Augustine approach is right either way, with secular stagnation suggesting the need to be even less chaste in the short run.

Yesterday’s second post was “Economic Ignorance Blogging:”

We need a name for a syndrome related to, but not quite the same as, the Dunning-Kruger effect. That effect, you may or may not know, shows that truly incompetent people are so incompetent that they believe themselves competent.

So, my related phenomenon involves not competence but knowledge. The truly ignorant, I often find, don’t know that they’re ignorant — in fact, they’re often under the delusion of having deep knowledge and understanding.

Today’s case in point: Brad DeLong goes on a well-justified rant against David K. Levine, who apparently cannot even conceive of the possibility of a general deficiency of demand — which puts him a couple of centuries out of date.

What Brad may have forgotten, or perhaps never noticed, was Levine’s rant against me back in 2009, accusing me of failing to understand the depth and power of modern economic analysis.

Krugman’s blog, 3/14/15

March 16, 2015

There were two posts on Saturday, and none yesterday.  Saturday’s first post was “John and Maynard’s Excellent Adventure:”

When I tell people that macroeconomic analysis has been triumphantly successful in recent years, I tend to get strange looks. After all, wasn’t everyone predicting lots of inflation? Didn’t policymakers get it all wrong? Haven’t the academic economists been squabbling nonstop?

Well, as a card-carrying economist I disavow any responsibility for Rick Santelli and Larry Kudlow; I similarly declare that Paul Ryan and Olli Rehn aren’t my fault. As for the economists’ disputes, well, let me get to that in a bit.

I stand by my claim, however. The basic macroeconomic framework that we all should have turned to, the framework that is still there in most textbooks, performed spectacularly well: it made strong predictions that people who didn’t know that framework found completely implausible, and those predictions were vindicated. And the framework in question – basically John Hicks’s interpretation of John Maynard Keynes – was very much the natural way to think about the issues facing advanced countries after 2008.

So let me talk about where Hicksian analysis comes from.

What many macroeconomists don’t realize, I believe, is that Hicks on Keynes actually grows directly from Hicks’s own work on microeconomics — not mainly macroeconomics — embodied in his book Value and Capital. V&C was a seminal work on the economics of general equilibrium – that is, getting past one-market-at-a-time supply and demand to the interactions among markets. Hicks didn’t invent general equilibrium, of course, but he sought to turn it into a useful tool of analysis.

What’s the minimum interesting general equilibrium problem? The answer is, an economy with three goods, which means that there are two relative prices. You can think of such an economy as having three markets, but because of adding up you only need to look at two – if any two are in equilibrium, so is the third.

Geometrically, you can represent equilibrium in a three-good economy in a space defined by the two relative prices. Say that there are three goods, X, Y, and Z. Choose Z as the numeraire – the good in which prices are measured. Then we have the price of X on one axis, the price of Y on the other. There will be many combinations of those two prices at which the market for X clears, defining one schedule in this space; you can similarly define a schedule representing prices at which the market for Y clears, and yet again for Z. Where all three lines cross (remember the adding up) is the equilibrium for the economy as a whole.

What does this have to do with macroeconomics? Well, as Hicks realized, a minimal model of macro issues involves three markets: the markets for goods, bonds, and money (or, better, monetary base). If we assume that all three are gross substitutes – the most natural though not inevitable assumption – we get Figure 1:

We can make this more familiar by putting the interest rate – which moves inversely to the price of bonds – on the axis, which flips the figure upside down, and by removing one of the markets; what we get is Figure 2, which is basically IS-LM:

Figure 2

When I tell people that macroeconomic analysis has been triumphantly successful in recent years, I tend to get strange looks. After all, wasn’t everyone predicting lots of inflation? Didn’t policymakers get it all wrong? Haven’t the academic economists been squabbling nonstop?

Well, as a card-carrying economist I disavow any responsibility for Rick Santelli and Larry Kudlow; I similarly declare that Paul Ryan and Olli Rehn aren’t my fault. As for the economists’ disputes, well, let me get to that in a bit.

I stand by my claim, however. The basic macroeconomic framework that we all should have turned to, the framework that is still there in most textbooks, performed spectacularly well: it made strong predictions that people who didn’t know that framework found completely implausible, and those predictions were vindicated. And the framework in question – basically John Hicks’s interpretation of John Maynard Keynes – was very much the natural way to think about the issues facing advanced countries after 2008.

So let me talk about where Hicksian analysis comes from.

What many macroeconomists don’t realize, I believe, is that Hicks on Keynes actually grows directly from Hicks’s own work on microeconomics — not mainly macroeconomics — embodied in his book Value and Capital. V&C was a seminal work on the economics of general equilibrium – that is, getting past one-market-at-a-time supply and demand to the interactions among markets. Hicks didn’t invent general equilibrium, of course, but he sought to turn it into a useful tool of analysis.

What’s the minimum interesting general equilibrium problem? The answer is, an economy with three goods, which means that there are two relative prices. You can think of such an economy as having three markets, but because of adding up you only need to look at two – if any two are in equilibrium, so is the third.

Geometrically, you can represent equilibrium in a three-good economy in a space defined by the two relative prices. Say that there are three goods, X, Y, and Z. Choose Z as the numeraire – the good in which prices are measured. Then we have the price of X on one axis, the price of Y on the other. There will be many combinations of those two prices at which the market for X clears, defining one schedule in this space; you can similarly define a schedule representing prices at which the market for Y clears, and yet again for Z. Where all three lines cross (remember the adding up) is the equilibrium for the economy as a whole.

What does this have to do with macroeconomics? Well, as Hicks realized, a minimal model of macro issues involves three markets: the markets for goods, bonds, and money (or, better, monetary base). If we assume that all three are gross substitutes – the most natural though not inevitable assumption – we get Figure 1:

We can make this more familiar by putting the interest rate – which moves inversely to the price of bonds – on the axis, which flips the figure upside down, and by removing one of the markets; what we get is Figure 2, which is basically IS-LM:

Figure 2

Wait, you say, isn’t IS-LM usually presented as a model of output, not the price level? Yes – but you can get there by invoking sticky prices and/or wages, so that there’s an upward-sloping aggregate supply curve, without changing the figure. In practice we think that AS is very, very flat in the short run, so that you do better by just putting GDP on the axis, but this is good enough for my purposes now.

A different kind of objection involves what, exactly, is going on behind these curves. On one side, can we just assume sticky prices without deriving them from first principles? Actually, yes – the evidence is overwhelming. Meanwhile, the demand for goods involves intertemporal decisions, driven by expectations about the future, so don’t we need to specify all of that explicitly? Well, no – of course we want to understand such things as well as we can, but is it really unreasonable to assume that lower interest rates mean higher demand under pretty much any detailed story?

A foolish insistence on microfoundations at all times and no matter what the issue is the hobgoblin of little minds.

So what is the payoff to this application of miniature general-equilibrium theorizing to macro? Even in normal times, this approach, Mickey Mouse as it looks, offers a big step up in sophistication from a lot of what you hear – including what you hear from economists who are all teched up but have no idea how to apply their equations to anything real. In particular, a lot of what you hear about macro issues is monocausal: money drives the price level, borrowing drives interest rates. What we already have here is an understanding that there isn’t that kind of clean separation, that money can affect interest rates and spending affect output.

But the really big payoff, as Hicks realized all the way back in 1937, is that this framework tells you what happens when interest rates get close to zero. We’re all doing a lot of head-scratching lately about negative rates, but still, it’s clear that there’s something like a floor, so that the picture looks something like Figure 3:

Figure 3

And that in turn says that once you hit that flat section – once you are in a liquidity trap – the rules change. Even huge increases in the monetary base won’t be inflationary – they shift MM to the right, but it makes no difference. Large budget deficits, which shift GG, won’t raise rates. However, changes in spending, positive or negative – e.g., harsh austerity — will have an unusually large effect on output, because they can’t be offset by changes in interest rates.

All of this was predicted in advance by those of us who understood and appreciated Hicksian analysis. And so it turned out. I call this a huge success story – one of the best examples in the history of economics of getting things right in an unprecedented environment.

The sad thing, of course, is that this incredibly successful analysis didn’t have much favorable impact on actual policy. Mainly that’s because the Very Serious People are too serious to play around with little models; they prefer to rely on their sense of what markets demand, which they continue to consider infallible despite having been wrong about everything. But it also didn’t help that so many economists also rejected what should have been obvious.

Why? Many never learned simple macro models – if it doesn’t involve microfoundations and rational expectations, preferably with difficult math, it must be nonsense. (Curiously, economists in that camp have also proved extremely prone to basic errors of logic, probably because they have never learned to work through simple stories.) Others, for what looks like political reasons, seemed determined to come up with some reason, any reason, to be against expansionary monetary and fiscal policy.

But that’s their problem. From where I sit, the past six years have been hugely reassuring from an intellectual point of view. The basic model works; we really do know what we’re talking about.

The second post on Saturday was “A Note on Dollar Strength:”

Tim Duy is having a debate with Scott Sumner, who insists that the strong dollar won’t hurt US growth.

I think we need to think about this both conceptually and quantitatively, and I’m not nearly so sanguine.

Sumner says that you can’t reason from a price change; the dollar doesn’t just move for no reason, so you have to go back to the underlying cause and ask what effect it has. Actually, asset price moves often have no clear cause — they’re bubbles, or driven by changes in long-term expectations, so you really do want to ask about the effects of price changes you can’t explain very well.

More specifically, Sumner is right that if the euro’s fall is being driven by expansionary monetary policy, this affects the U.S. through the demand channel as well as competitiveness, so it may be a wash. But I’ve already argued that the fall in the euro is much bigger than you can explain with monetary policy; it seems to reflect the perception that Europe is going to be depressed for the long term. And if that’s what drives the weak euro/strong dollar, it will hurt US growth.


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