Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 11/30/15

December 1, 2015

There were two posts yesterday.  The first was “Is The Economy Self-Correcting? (Wonkish):”

Via Mark Thoma, there have been multiple interesting responses to my post about what has and hasn’t worked in macro since 2008. I guess the piece was useful, if only for focusing debate.

What I want to focus on in this post is the suggestion by Brad DeLong that I missed a failed implication of Hicksian analysis — that demand shocks should be short-term in their effect. Actually, and very unusually, I think Brad has this wrong. The proposition of a long-run tendency toward full employment isn’t a primitive axiom in IS-LM. It’s derived from the model, under certain assumptions. But there’s good reason to believe that even under “normal” conditions it’s a very weak, slow process. And under liquidity trap conditions it’s not a process we expect to see operate at all.

How is the self-correction of an economy to its long-run equilibrium supposed to work? In textbook analysis, the story is that falling prices raise the real money supply, pushing down interest rates, and hence restoring employment.

So how rapidly would we expect this process to work? Let’s take the most favorable assumption, which is that of a constant velocity of money. Under those conditions, holding the money supply fixed would also hold nominal GDP fixed, so that a one percent fall in the price level would raise real output by one percent. The question then is how responsive prices are to the output gap.

Well, Blanchard, Cerutti and Summers have a new paper that estimates an an “anchored expectations” Phillips curve (aka an old-fashioned, pre-Friedman/Phelps curve), and finds the coefficient on unemployment for the US to be about -.25. That’s for unemployment; on output, given Okun’s Law, the coefficient should be only half that. This implies a half-life for output gaps of around 6 years. The long run is pretty long, in other words; we might not all be dead, but most of us will be hitting mandatory retirement.

And that’s assuming constant velocity. With interest rates dropping, part of the fall in prices should translate into a fall in velocity rather than a rise in real output, so the implied speed of adjustment should be even lower.

But wait, it gets worse: at the zero lower bound the process doesn’t work at all. In a liquidity trap, the proposition of a self-correcting economy falls down — in fact, what more flexible prices would do, arguably, is bring on a debt-deflation spiral.

Yes, a sufficiently large price fall could bring about expectations of future inflation — but that’s not the droid we’re looking formechanism we’re talking about here.

You might ask, given this logic, why actual slumps usually don’t last all that long. The answer is, first, that the shocks causing slumps are often temporary; but second, in practice central banks don’t sit there passively, holding the money supply constant, but in fact push back against slumps with expansionary policy. The economy isn’t self-correcting, at least on a time scale that matters; it relies on Uncle Alan, or Uncle Ben, or Aunt Janet to get back to full employment.

Which brings us back to the liquidity trap, in which the central bank loses most if not all of its traction. Nothing about basic macro models says that there should be a fast return to long-run equilibrium under those conditions, so the failure to see such a fast return is actually a point in favor of the model, not a failure.

Yesterday’s second post was “Hyperglobalization and Global Inequality:”

I’ve mentioned before that I’m a big fan of work by my CUNY colleague Branko Milanovic showing that if you look at income growth by percentile of the whole world population for the past 25 years, you see “twin peaks”: rapid growth near the middle, representing China’s middle class, and at the top, representing the global elite, with a sag in the region representing the OECD working class. But was it always thus? I asked Branko what a similar picture looked like for the previous generation — and he has obliged.

Here’s a version of the original Milanovic history of the world in one chart:

Branko calls this the elephant picture, although I don’t see it; Janet Gornick says it’s a camel. I say it’s very like a whale …

But here’s the picture for the preceding generation — by “ventile”, that is, 5 percent interval, rather than percentile — and it doesn’t look at all similar:

So pre-1990 or so we had no visible tendency toward either inequality or equality at a world level; the elephant-camel-whale is for the later period. That’s interesting, because post-1990 is also the period of hyperglobalization, of unprecedented growth in trade due to slicing up of the value chain.

How big is the causal link? I don’t know. But there is, I’d argue, an important and interesting stylized fact here for us to work with.

Krugman’s blog, 11/28/15

November 30, 2015

There was one post on Saturday, none yesterday.  Saturday’s post was “Demand, Supply, and Macroeconomic Models:”

I’m supposed to do a presentation next week about “shifts in economic models,” which has me trying to systematize my thought about what the crisis and aftermath have and haven’t changed my understanding of macroeconomics. And it seems to me that there is an important theme here: it’s the supply side, stupid.

What I mean by that is that if you came into the crisis with a broadly Hicksian view of aggregate demand you did quite well. You made predictions that Very Serious People scoffed at — that as long as we were at the zero lower bound massive increases in the monetary base wouldn’t be inflationary, that budget deficits would not drive up interest rates — and also predicted large multipliers from fiscal policy, in particular nasty consequences of austerity. And you would not have found anything in what happened from 2008 on that contradicted your views.

I worded the above carefully. There’s a whole industry of people trying to show that Keynesian predictions about austerity didn’t pan out; it’s an industry that relies mainly on crude misrepresentations of what those predictions really amount to, and especially on confusions between levels and rates of change. (Britain imposed a lot of austerity from 2010 to 2012, but it grew in 2013. Ha! Keynes disproved!) But I won’t claim that the data prove Hicks/Keynes models right; the point is just that when you do the obvious comparisons, say between austerity and growth, they’re pretty much what a Keynesian would have said:

What hasn’t worked nearly as well is our understanding of aggregate supply — which was, if truth be told, always based on much less solid reasoning.

One big problem has been the absence of deflation. The “accelerationist” Phillips curve that used to be standard — inflation depends on unemployment and lagged inflation — seemed consistent with the experience from previous big slumps, which were associated with large declines in the rate of inflation. Specifically, we used to cite the “clockwise spirals” one saw in unemployment-inflation space as evidence for something like the Friedman-Phelps theory of the natural rate.

But what worked in the 70s and 80s doesn’t look so good for recent experience:

Why didn’t the sustained high unemployment after 2008 push us into deflation? There are some popular stories — downward nominal wage rigidity that makes the long-run Phillips curve non-vertical at low inflation rates, “anchored” inflation expectations — and I cite those stories myself. But standard discourse on macroeconomics has not fully taken the non-deflation surprise into account.

The other big problem is the dramatic drop in estimates of potential output, which is clearly correlated with the depth of cyclical slumps — and with austerity policies. Fatas and Summers have made a splash recently making this point, but Larry Ball has been on the case for a while — and I made the link to austerity. Here’s what it looks like using Ball’s estimates of the fall in potential output:

Is there a policy moral from these supply-side failures of the pre-crisis doctrine? Yes: I think they both suggest the great danger of excessively contractionary policies. On one side, central banks focused on stable inflation may think they’re doing a good job — because where’s the deflation? — when they are actually falling very far short of providing enough support. And fiscal contraction in a liquidity trap seems to be absolutely terrible for the long run as well as the short run, and quite possibly counterproductive even in purely fiscal terms.

Again, I don’t think even Hicksian-inclined economists have taken all of this sufficiently into account.

Krugman’s blog, 11/26 and 11/27/15

November 28, 2015

There was one post on Thanksgiving and one yesterday.  Turkey Day’s post was “A Very Trump Thanksgiving:”


I awakened, long before dawn, to the sound of helicopters patrolling the Upper West Side. Many helicopters. I guess they’re protecting Snoopy. Then, over coffee, I read more Alan Abramowitz on how The Donald could be the nominee.

Indeed. All the rules have changed. Media mockery of Trump has no impact — perhaps because even the candidates considered respectable would have been considered out of bounds not that long ago. Consider the guy getting a lot of establishment puffery lately, supposedly making a comeback: he exemplifies the transition from a nation whose motto was “speak softly and carry a big stick” to one whose de facto motto is yell a lot and carry a strawberry smoothie.

Oh well. Time to get ready for the relatives.

Yesterday’s post was “Iceland, Ireland, and Devaluation Denial:”

International Monetary Fund

One of the big lessons of the euro crisis has been that Milton Friedman was right — not about monetarism, but about the case forflexible exchange rates. When big adjustments in a country’s wages and prices relative to trading partners are necessary, it’s much easier to achieve these adjustments via currency depreciation than via relative deflation — which is one main reason there have been such big costs to the euro.

But many economists remain deeply unwilling to accept this point. And so in Thordvaldur Gylfason’s otherwise useful survey of Iceland since the crisis, we get this:

In Ireland, the 2007 level of the purchasing power of per capita GNI was restored a year later than in Iceland, in 2014.

It is, therefore, not true that having its own currency (which lost a third of its value in real terms during the crash) saved Iceland from the sorry fate that Ireland would have to suffer because Ireland is anchored to the euro.

Ireland adjusted by other means. Iceland, had it used the euro, could have done the same. The Icelandic króna has lost 99.95% of its value vis-à-vis the Danish krone since 1939 when the two currencies were equivalent, convincing many local observers that Iceland is ripe for the adoption of the euro.

OK, the bit about depreciation since 1939 — 1939! — is a cheap shot. What about the Ireland comparison?

It’s true that Irish GDP per capita (in this case using GNI doesn’t make much difference) recovered to its pre-crisis level only a bit later than Iceland’s. But that’s not the only indicator, and it’s one that is arguably distorted by the nature of the Irish export sector, which held up fairly well and is highly capital-intensive (think pharmaceuticals) — that is, it contributes a lot to GDP but employs very few people.

If you look at employment instead, as in the chart, Iceland did far better than Ireland; and Icelandic unemployment similarly shows a much more favorable picture. Less formally, everyone I know who tracked both countries has the sense that the human toll in Iceland was much less than it was in Ireland.

Oh, and if you remember, everyone expected the Icelandic crisis to be much worse, given the incredible scale of the banking overreach — early on, comparisons between the two in Ireland were regarded as black humor, not something anyone expected to be meaningful.

I guess I understand the urge to make excuses for the single currency. But the evidence really does suggest that there are important advantages to keeping your own currency.

Krugman’s blog, 11/25/15

November 26, 2015

There was one post yesterday, “It’s A Conspiracy!”:

Greg Sargent has lately been driving home the point that Donald Trump just isn’t vulnerable to typical establishment attacks — at least in the Republican primary. (The general election might be different.) Catch him making an utterly false assertion, and his supporters just see it as the liberal media conspiring against him. It’s driving the establishment Republicans wild.

But really, why should they be shocked? Think about what the establishment has to say on other issues. The chairman of the House science committee says that global warming is a fraud, perpetrated by a vast conspiracy at the NOAA, which is presumably part of a global scientific conspiracy. When the administration reported large numbers of people signing up for Obamacare, leading Republican Senators accused it of cooking the books — and I’m unaware of any apology or even acknowledgement that they were wrong. Rush Limbaugh claimed that one of the Batman films was an anti-Romney conspiracy. And on and on.

So how are base voters supposed to know that Trump’s claims that the media suppressed films of Muslims cheering on 9/11 mark him as crazy, while all the other conspiracy theories on the right are OK? I guess someone could try to put out a cheat sheet listing acceptable and unacceptable tin-hat views; but Trump would just call that part of the conspiracy, and a lot of people would believe him.

Sorry, guys, you created this monster, and now he’s coming for you.

Sow the wind, reap the whirlwind.

Krugman’s blog, 11/23/15

November 24, 2015

There were two posts yesterday.  The first was “Shorts Subject:”

Last night I was invited to a screening of The Big Short, which I thought was terrific; who knew that CDOs and credit default swaps could be made into an edge-of-your-seat narrative (with great acting)?

But there was one shortcut the narrative took, which was understandable and possibly necessary, but still worth noting.

In the film, various eccentrics and oddballs make the discovery that subprime-backed securities are garbage, which is pretty much what happened; but this is wrapped together with their realization that there was a massive housing bubble, which is presented as equally contrary to anything anyone respectable was saying. And that’s not quite right.

It’s true that Greenspan and others were busy denying the very possibility of a housing bubble. And it’s also true that anyone suggesting that such a bubble existed was attacked furiously — “You’re only saying that because you hate Bush!” Still, there were a number of economic analysts making the case for a massive bubble. Here’s Dean Baker in 2002. Bill McBride (Calculated Risk) was on the case early and very effectively. I keyed off Baker and McBride, arguing for a bubble in 2004 and making my big statement about the analytics in 2005, that is, if anything a bit earlier than most of the events in the film. I’m still fairly proud of that piece, by the way, because I think I got it very right by emphasizing the importance of breaking apart regional trends.

So the bubble itself was something number crunchers could see without delving into the details of MBS, traveling around Florida, or any of the other drama shown in the film. In fact, I’d say that the housing bubble of the mid-2000s was the most obvious thing I’ve ever seen, and that the refusal of so many people to acknowledge the possibility was a dramatic illustration of motivated reasoning at work.

The financial superstructure built on the bubble was something else; I was clueless about that, and didn’t see the financial crisis coming at all.

Yesterday’s second post was “Terror Politics:”

Conventional wisdom on the politics of terror seems to be faring just as badly as conventional wisdom on the politics of everything. Donald Trump went up, not down, in the polls after Paris — Republican voters somehow didn’t decide to rally around “serious” candidates. And as Greg Sargent notes, polls suggest that the public trusts Hillary Clinton as much if not more than Republicans to fight terror.

May I suggest that these are related?

After all, where did the notion that Republicans are effective on terror come from? Mainly from a rally-around-the-flag effect after 9/11. But if you think about it, Bush became America’s champion against terror because, um, the nation suffered from a big terrorist attack on his watch. It never made much sense.

What Bush did do was talk tough, boasting that he would get Osama bin Laden dead or alive. But, you know, he didn’t. And guess who did?

So people who trust Republicans on terror — which presumably includes the GOP base — are going to be the kind of people who value big talk and bluster over actual evidence of effectiveness. Why on earth would you expect such people to turn against Trump after an attack?

Krugman’s blog, 11/21 and 11/22/15

November 23, 2015

There was one post on Saturday, and two yesterday.  Saturday’s post was “Are Banks Europe’s Problem?”:

For those of us who worried a lot about Japan in the late 1990s and now find the whole advanced world facing similar problems, deja vu comes so often that we get deja vu about getting deja vu. A case in point is the rise and fall of European bank-blaming — that is, the argument that the weakness of banks is what’s holding European recovery back.

At FtAlphaville, Matthew Klein looks at the evidence, and is surprised to find that there’s little support for the bad-banks-did-it story, even though everyone repeats it. But look back at my 1998 BPEA on Japan, which is more or less where I came in. Back then it was almost universally insisted that the failure of monetary base expansion to filter through into bank lending showed that a dysfunctional banking system was the core of Japan’s problem. But I argued (154-158) that the nonresponse of monetary aggregates was exactly what you should expect in a liquidity trap, and that there was little evidence (174-177) that banking problems were actually central to the economy’s weakness.

So, deja vu all over again, all over again.

Yesterday’s first post was “Thinking About the Trumpthinkable:”

I'm not a political scientist, man
I’m not a political scientist, man

Alan Abramowitz reads the latest WaPo poll and emails:

Read these results and tell me how Trump doesn’t win the Republican nomination? I’ve been very skeptical about this all along, but I’m starting to change my mind. I think there’s at least a pretty decent chance that Trump will be the nominee.

Here’s why I think Trump could very well end up as the nominee:

1. He’s way ahead of every other candidate now and has been in the lead or tied for the lead for a long time.

2. The only one even giving him any competition right now is Carson who is even less plausible and whose support is heavily concentrated among one (large) segment of the base—evangelicals.

3. Rubio, the great establishment hope now, is deep in third place, barely in double digits and nowhere close to Trump or Carson.

4. By far the most important thing GOP voters are looking for in a candidate is someone to “bring needed change to Washington.”

5. He is favored on almost every major issue by Republican voters including immigration and terrorism by wide margins. The current terrorism scare only helps him with Republicans. They want someone who will “bomb the shit” out of the Muslim terrorists.

6. There is clearly strong support among Republicans for deporting 11 million illegal immigrants. They don’t provide party breakdown here, but support for this is at about 40 percent among all voters so it’s got to be a lot higher than that, maybe 60 percent, among Republicans.

7. If none of the totally crazy things he’s said up until now have hurt him among Republican voters, why would any crazy things he says in the next few months hurt him?

8. He’s very strong in several of the early states right now including NH, NV and SC. And he could do very well on “Super Tuesday” with all those southern states voting. I can’t see anyone but Trump or Carson winning in Georgia right now, for example, most likely Trump.

9. And as for the idea of the GOP establishment ganging up on him and/or uniting behind another candidate like Rubio, that’s at least as likely to backfire as to work. And even if it works, what’s to stop Trump from then running as an independent?

Indeed. You have a party whose domestic policy agenda consists of shouting “death panels!”, whose foreign policy agenda consists of shouting “Benghazi!”, and which now expects its base to realize that Trump isn’t serious. Or to put it a bit differently, the definition of a GOP establishment candidate these days is someone who is in on the con, and knows that his colleagues have been talking nonsense. Primary voters are expected to respect that?

Yesterday’s second post was “VSPs and the Case of the Disappearing BPEA:”

Brad Delong has nice things to say about my old Brookings Papers on Economic Activity on the liquidity trap, and asks why central bankers still don’t seem to get some of the basic points I made way back then, especially about the desirability of a higher inflation target. I actually have a few thoughts, which are inevitably mostly — but not entirely! — self-serving.

First, most trivially but possibly significant, I suspect that fewer macroeconomists have actually read that paper than you might think. I still run into people who believe that the modern liquidity-trap literature started with Eggertsson and Woodford, which was written several years later, and that my piece must have been a commentary on theirs (which was very good!) And it’s been very clear that remarkably few people read what I had to say aboutfinancial intermediaries and monetary aggregates, even though that has turned out, I’d argue, to be a really important insight.

This comes, I think, from the kind of micro-tribalism that is surprisingly powerful in academic economics: I have never been part of the domestic-economy macroeconomic regular circuit, so some of them couldn’t believe that I could have something new to tell them (or were simply unaware that the paper even existed.)

After all, in the early stages of the crisis response you encountered lots of macroeconomists asserting that “nobody” had discussed fiscal policy in recent years, even though Obstfeld and Rogoff had done plenty in their big 1996 book; the point is that Obstfeld and Rogoff were in the international macro circuit, and domestic guys weren’t listening.

Oh, and by the time some of them may have gotten a clue that I wrote something they maybe should read, I was politically controversial, which shouldn’t matter but does. In effect, some people may have been unwilling to consider that I might have been right about macroeconomics because I had committed the unforgivable sin of being right about Iraq. (I told you this would be self-serving!)

Second, the whole story of our woeful crisis response has been that Very Serious People seize on orthodoxies that are grounded more in their gut feelings and the comfort that comes from repeating what everyone else says than in economic analysis. Central bankers are more given to analytical thinking than most, but it’s still a very brave official who disputes the orthodoxy of 2 percent, even though the original rationale for that target — it was supposed to make the zero lower bound no problem — has long since evaporated.

Finally, to be fair, there are arguments one can make that go beyond what I said in 1998. Some models of sticky prices suggest that inflation may have bigger costs than conventional models imply. I don’t find these models plausible, but it’s not all gut feelings here.

The bottom line, however, is that while you might think it obvious that a clearly relevant paper by a well-known guy with all the right credentials must be widely understood by people who matter, it ain’t necessarily so.

Krugman’s blog, 11/20/15

November 21, 2015

There were two posts yesterday.  The first was “Desperately Seeking Consensus:”

Kein Konsens hier.
Kein Konsens hier.

The good people at Vox EU are engaged in a laudable effort to clear the ground for euro reform, starting with the formulation of a “consensus narrative” about the origins of the euro crisis. This is a very good idea: How you think about the past plays a very large role in how you think about what should be done next.

Furthermore, their narrative looks very right to me. No, the EZ crisis wasn’t about fiscal irresponsibility, or failure to undertake structural reforms, or the debilitating effects of the welfare state, or any of the other stories floated by motivated reasoners. It was a “sudden stop” crisis, in which vast capital flows into peripheral economies came to an abrupt halt, precipitating severe hardship largely thanks to the ; fiscal issues were a consequence, not a cause, of this financial harrowing.

But can they actually get the consensus they seek? It’s definitely worth trying. It’s obvious, however, that a lot of people inside and outside the eurozone have strong vested interests in other narratives. Will German officials stop insisting that it’s all about fiscal profligacy? Will Osborne & Co., or for that matter U.S. fiscal scolds, accept a narrative in which membership in the euro was a crucial element of the debacle, undermining their warnings that the UK or the US will turn into Greece, Greece I tell you unless we adopt austerity now now now?

I have my doubts, to say the least.

Yesterday’s second post was “The Expansionary Austerity Zombie:”

The doctrine of expansionary austerity — the proposition that cuts in government spending would actually cause higher growth despite their direct negative impact on demand, thanks to the confidence fairy — was all the rage in policy circles five years ago. But it brutally failed the reality test; instead, the evidence pointed overwhelmingly to the continued existence of something very like the old-fashioned Keynesian multiplier.

But expansionary austerity was and is such a convenient doctrine politically that, like insistence on the magical effects of tax cuts, it has proved unkillable. Every economic uptick in an economy that practiced austerity in the past is trumpeted as proof that Keynesians were wrong and the austerians were right; never mind distinctions between levels and rates of change, or the fact that even the most Keynesian economists never asserted that fiscal policy is the *only* determinant of growth. (Animal spirits, anyone?) And in a predictable case of projection, anyone presenting the evidence gets accused of cherry-picking the data.

It’s never going to be possible to kill this zombie once and for all. But mainly for my own sake, I decided to provide a somewhat new take on the evidence.

The figure above covers the period from 2007 to 2015. This is a break from my previous efforts, which tended to start from 2009, just before the big austerity drive began.

On the horizontal axis I show an estimate of fiscal tightening, as measured by the IMF’s estimate of the cyclically adjusted primary balance (i.e., excluding interest payments) as a percentage of GDP. I have some doubts about that measure; in particular, the Fund’s method for estimating potential GDP tends to make pre-crisis economies look much more overheated than they probably were, and hence to make their structural budget position look worse; I think this is especially distorting in the case of Ireland, which has not in reality done more austerity than Greece. But in the interest of clarity, I’m just using the numbers as given.

Meanwhile, on the vertical axis I show, not the raw change in GDP, but the deviation of real GDP from what the IMF was projecting before the crisis. I derive the latter from the economic projections in the April 2008 World Economic Outlook, which went out to 2013; I assumed that projected growth 2007-2013 was expected to continue for two more years to get 2015 estimates.

What you see is a clear negative relationship between austerity and growth — actually an implied multiplier of almost 2. You also see some countries clearly experiencing other issues besides the effects of austerity. Ireland has done badly, but not as badly as you might have expected given the measured fiscal tightening (but see the discussion above.) Finland has done very badly despite mild austerity; the collapse of Nokia and the problems of forest products did the job there. The same is true of Spain, afflicted by the collapse of its mammoth housing bubble.

But the data continue to show an overwhelmingly Keynesian effect of fiscal policy. It take a lot of effort to see anything different in the evidence.

Krugman’s blog, 11/17/15

November 18, 2015

There were two posts yesterday.  The first was “The Farce Is Strong In This One:”

And that one, and that one, and, well, across the board.

It took no time at all for the right-wing response to the Paris attacks to turn into a vile caricature that has me feeling nostalgic for the restraint and statesmanship of Donald Rumsfeld and Dick Cheney.

Marco Rubio says that we have to denounce radical Islam — as opposed to jihadists — because of Hitler; after all, making Islam the rhetorical equivalent of Nazism is just the right thing to win support from the world’s 1.6 billion Muslims.

Niall Ferguson says that a terrorist attack on a couple of sites in a huge modern metropolis by a small number of gunmen is just likethe sack of Rome by the Goths.

Hugh Hewitt thinks that taking an Obama remark totally out of context will convince anyone except the right-wing base that the man who hunted down Osama bin Laden has been an anti-American terrorist sympathizer all along.

I’ve deliberately selected people who are sometimes portrayed as moderate, smart, or both. This is what the reasonable wing of the modern right looks like.

The second post yesterday was “Terrorists and Aliens:”

The Great Depression wasn’t ended by the intellectual victory of Keynesian economics; in fact, the publication of The General Theory was followed by the great mistake of 1937, when FDR tried to balance the budget too soon and send the U.S. economy into a severe recession. What put a decisive end to the slump was World War II, which led to deficit spending on a scale that was politically impossible before.

This story is what led me to facetiously suggest that we fake a threat from space aliens, to provide a politically acceptable cover for stimulus.

Now France has been attacked, unfortunately by real terrorists instead of fake aliens, and Hollande is declaring that security must take precedence over austerity. Is this the start of something big?

OK, obligatory disclaimer that will do no good in the face of the stupidity. I am NOT saying that terrorism is a good thing, just as those of us who point to wartime fiscal stimulus aren’t saying that World War II was a good thing. (Don’t kill baby Hitler — we need him to justify stimulus!) We’re just trying to think through some side effects of the atrocity.

The question we should ask is whether the fiscal indiscipline caused by jihadists will make a significant difference to French performance.

Well, my guess is that the numbers will probably be too small. U.S. defense and security spending rose by around 2 percent of GDP after 9/11 — but that involved a much bigger military buildup than France is likely to undertake, plus the Iraq War. More likely we’re looking at fraction of a percent of GDP, which is small compared with the austerity Europe has imposed. Unless the French response is much bigger than I’m imagining, the impact on growth won’t be large.

Krugman’s blog, 11/15/15

November 16, 2015

There was one post yesterday, “Fear and Friends:”

The news from Paris was horrifying, and deserved a break in the usual round of commentary, but surely nobody who has been paying attention was completely shocked. We know that there are jihadists out there, and even the best efforts at prevention will fail sometimes. We’ll have to see how this fairly elaborate plot went undetected, but really nothing about the story so far suggests that it should fundamentally change how we see the world.

We also knew that the usual suspects would react badly — but there, I think, there has been a surprise on the downside. As far as I can tell, nobody in the GOP field wants to say anything positive about the strength of Western democracy, or make a remark about the nature of a cause that has nothing going for it except the ability to kill innocent civilians. Instead, we have Jeb! insisting that we’re looking at a plan to destroy Western civilization, and Ted Cruz declaring that what we need to do is abandon our own scruples about killing innocent bystanders. Seize the moral high ground!

Meanwhile, the Democrats had a bizarrely rational and well-informed debate. By today’s standards, that’s positively un-American.

Krugman’s blog, 11/13/15

November 14, 2015

There was one post yesterday, “The Regime Change Problem in American Politics:”

This post isn’t about what you think it’s about. I’m not talking about a looming coup; I’m talking about the problems facing political science, which — it recently occurred to me — are a bit like the problems facing macroeconomics after 2008.

First things first: I’m a big admirer of political science, and a fairly heavy consumer of the more quantitative end. Larry Bartels, McCarty/Poole/Rosenthal, Alan Abramowitz, Andrew Gelman, and more have helped shape my understanding of what is going on in this country; I get more out of any one of their papers than out of a whole election cycle’s worth of conventional horse-race punditry. Studying what actually happens in elections, as opposed to spinning tales based on a few up-close-and personal interviews, is definitely the way to go.

Yet I don’t think I’m being unfair in saying that so far this cycle the political scientists aren’t doing too well. In particular, standard models of how the nomination process works seem to be having trouble with the durability of clowns. Things don’t seem to be working the way they used to.

And this makes me think of the way some economic analysis went astray after 2008. In particular, I’m reminded of the way many fairly reasonable analysts underestimated the adverse effects of austerity. They looked at historical episodes, and this led them to expect around a half point of GDP contraction for every point of fiscal tightening. What actually seems to have happened was around three times that much.

Now, as it happens we know why — and some people (e.g., me) predicted this in advance: the conditions under which past austerity took place were different from the recent episode, in which monetary policy was constrained by the zero lower bound and unable to offset fiscal contraction. But the point was that the world had entered a different regime, in which historical relationships could be and were misleading.

And surely it’s not too much of a stretch to say that something equally or more fundamental has happened to US politics. Partisan divisions run deeper; establishment figures are widely distrusted; the GOP base has gone mad; and so on. History is just less of a guide than it used to be.

In the case of macroeconomics, fortunately, we had models that allowed us to make reasonably good predictions about how the regime would shift at the ZLB. If there’s anything comparable in political science, I don’t know about it (but would be happy to be enlightened.)

I’ll still take academic analysis over horserace punditry any day. But we really do know less than ever.


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