Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 7/27 and 7/28/15

July 29, 2015

There were two posts on Monday and two yesterday.  Monday’s first post was “The Donald and the Delusional:”

Nate Cohn cautions us not to make too much of the polls supposedly showing the Trump surge continuing, as many — but not all – were taken before the McCain affair. Fair point. But there’s enough genuine post-McCain polling to show that Trump hasn’t imploded, the way virtually every pundit predicted he would.

I’m actually mad at myself here: I had meant to put up a post questioning that conventional wisdom, but never got around to it, and now you only have my word that what I’m about to say isn’t just hindsight, but a prediction. Oh well. Anyway, on to the point.

What I would argue is key to this situation — and, in particular, key to understanding how the conventional wisdom on Trump/McCain went so wrong — is the reality that a lot of people are, in effect, members of a delusional cult that is impervious to logic and evidence, and has lost touch with reality.

I am, of course, talking about pundits who prize themselves for their centrism.

Pundit centrism in modern America is a strange thing. It’s not about policy, as you can see from the many occasions when members of the cult have demanded that Barack Obama change his ways and advocate things that … he was already advocating. What defines the cult is, instead, the insistence that the parties are symmetric, that they are equally extreme, and that the responsible, virtuous position is always somewhere in between.

The trouble is that this isn’t remotely true. Democrats constitute a normal political party, with some spread between its left and right wings, but in general espousing moderate positions. The GOP, on the other hand, is a deeply radical faction; even its supposed moderates are moderate only in tone, not in policy positions, and its base is motivated by anger against Others.

What this means, in turn, is that to sustain their self-image centrists must misrepresent reality.

On one side, they can’t admit the moderation of the Democrats, which is why you had the spectacle of demands that Obama change course and support his own policies.

On the other side, they have had to invent an imaginary GOP that bears little resemblance to the real thing. This means being continually surprised by the radicalism of the base. It also means a determination to see various Republicans as Serious, Honest Conservatives — SHCs? — whom the centrists know, just know, have to exist.

We saw this a lot in the cult of Paul Ryan, who was and is very obviously a con man, whose numbers have never added up, but who was nonetheless treated with vast respect — and still sometimes is.

But the ur-SHC is John McCain, the Straight-Talking Maverick. Never mind that he is clearly eager to wage as many wars as possible, that he has long since abandoned his once-realistic positions on climate change and immigration, that he tried to put Sarah Palin a heartbeat from the presidency. McCain the myth is who they see, and keep putting on TV. And they imagined that everyone else must see him the same way, that Trump’s sneering at his war record would cause everyone to turn away in disgust.

But the Republican base isn’t eager to hear from SHCs; it has never put McCain on a pedestal; and people who like Donald Trump are not exactly likely to be scared off by his lack of decorum.

For what it’s worth, I still don’t expect The Donald to win the nomination; the big money will presumably coalesce around someone — though given Jeb’s foot-in-mouth performance it’s hard to see who — and will probably squeeze him out in the end. But the story so far has been a remarkable illustration of how little many professional political pundits seem to understand.

Monday’s second post was “Contingency Plans:”

People are apparently shocked, shocked to learn that Greece did indeed have plans to introduce a parallel currency if necessary. I mean, really: it would have been shocking if there weren’t contingency plans. Preparing for something you know might happen doesn’t show that you want it to happen.

Someday, maybe, we’ll know what kind of contingency plans the United States has had over the years. Plans to invade Canada? Probably. Plans to declare martial law in the event of a white supremacist uprising? Maybe.

The issue now becomes whether Tsipras was right to decide not to invoke this plan in the face of what amounted to extortion from the creditors. I think he called it wrong, but God knows it was an awesome responsibility — and we may never know who was right.

The first post yesterday was “Trumped Again:”

In my inbox:

NEW HAMPSHIRE: TRUMP LEADS, BUSH SECOND
Christie, Walker, Cruz may be most hurt by Trump

West Long Branch, NJ – Donald Trump holds a sizable edge in the Monmouth University Poll of likely New Hampshire Republican presidential primary voters, with a 2-to-1 edge over his nearest rival Jeb Bush. When second choices are taken into account, Trump takes votes from nearly all of his opponents, but appears to hurt Chris Christie, Scott Walker, and Ted Cruz the most.
One-quarter of likely GOP primary voters in New Hampshire currently support Donald Trump (24%), with Jeb Bush placing second at 12%. Rounding out the top ten are newly announced candidate John Kasich (7%), Scott Walker (7%), Marco Rubio (6%), Ben Carson (5%), Rand Paul (5%), Chris Christie (4%), Carly Fiorina (3%) and Ted Cruz (3%). Mike Huckabee, Bobby Jindal, and George Pataki each get 2%, while Rick Perry, Rick Santorum, Lindsey Graham, and Jim Gilmore earn 1% or less.. Another 14% of likely primary voters are undecided.
“The controversy over comments about John McCain’s war service do not appear to have slowed the Trump steamroller,” said Patrick Murray, director of the independent Monmouth University Polling Institute in West Long Branch, NJ. The Monmouth poll is the first to be conducted in New Hampshire entirely after Trump’s July 18 comments.

What I’m wondering: How, exactly, does the Trump implosion everyone is predicting happen at this point? The punditocracy wrote him off over the McCain comments, and was totally wrong. If base voters haven’t decided that he’s a buffoon yet, what new information will convince them?

Also note that mainstream Republican candidates are responding to the Trump surge by amping up their own inflammatory rhetoric, which makes their difference from The Donald ever less apparent.

I don’t know about other people, but I am starting to hedge my bets a bit. Maybe he really can get the nomination.

Yesterday’s second post was “Second-Best Macroeconomics:”

There’s a paradox about economic policy since the Great Recession, one that is often acknowledged implicitly but rarely stated directly. On one side, the economic problems facing both the United States and Europe have been quite straightforward and comprehensible. On the other side, the debate over actual policy has been tortured and confused, with a general sense even among aficionados that the tools being deployed are inadequate and come with troubling side effects.

Specifically, the whole western world has spent years suffering from a severe shortfall of aggregate demand; in Europe a severe misalignment of national costs and prices has been overlaid on this aggregate problem. These aren’t hard problems to diagnose, and simple macroeconomic models — which have worked very well, although nobody believes it — tell us how to solve them. Conventional monetary policy is unavailable thanks to the zero lower bound, but fiscal policy is still on tap, as is the possibility of raising the inflation target. As for misaligned costs, that’s where exchange rate adjustments come in. So no worries: just hit the big macroeconomic That Was Easy button, and soon the troubles will be over.

Except that all the natural answers to our problems have been ruled out politically. Austerians not only block the use of fiscal policy, they drive it in the wrong direction; a rise in the inflation target is impossible given both central-banker prejudices and the power of the goldbug right. Exchange rate adjustment is blocked by the disappearance of European national currencies, plus extreme fear over technical difficulties in reintroducing them.

As a result, we’re stuck with highly problematic second-best policies like quantitative easing and internal devaluation.

In case you don’t know, “second best” is an economic term of art. It comes from a classic 1956 paper by Lipsey and Lancaster, which showed that policies which might seem to distort markets may nonetheless help the economy if markets are already distorted by other factors. For example, suppose that a developing country’s poorly functioning capital markets are failing to channel savings into manufacturing, even though it’s a highly profitable sector. Then tariffs that protect manufacturing from foreign competition, raise profits, and therefore make more investment possible can improve economic welfare.

The problems with second best as a policy rationale are familiar. For one thing, it’s always better to address existing distortions directly, if you can — second best policies generally have undesirable side effects (e.g., protecting manufacturing from foreign competition discourages consumption of industrial goods, may reduce effective domestic competition, and so on). There’s also a political economy concern, which is that in a complicated world you can come up with a second best rationale for practically anything. Somewhere the Chicago economist Harry Johnson wrote (this is from memory) that in practice “second best policies are always devised by third-best economists working for fourth-best politicians” — harsh, but you can see his point.

But here we are, with anything resembling first-best macroeconomic policy ruled out by political prejudice, and the distortions we’re trying to correct are huge — one global depression can ruin your whole day. So we have quantitative easing, which is of uncertain effectiveness, probably distorts financial markets at least a bit, and gets trashed all the time by people stressing its real or presumed faults; someone like me is then put in the position of having to defend a policy I would never have chosen if there seemed to be a viable alternative.

In a deep sense, I think the same thing is involved in trying to come up with less terrible policies in the euro area. The deal that Greece and its creditors should have reached — large-scale debt relief, primary surpluses kept small and not ramped up over time — is a far cry from what Greece should and probably would have done if it still had the drachma: big devaluation now. The only way to defend the kind of thing that was actually on the table was as the least-worst option given that the right response was ruled out.

Which makes me ask myself the question: Do people like me spend too much time being limited by what is presumed to be politically practical? Should we devote more time to trying to widen the range of options, to pointing out that we really would be much better off if we threw off the fetters of conventional deficit fears, the 2 percent inflation target, and the extremely ill-advised euro project?

Krugman’s blog, 7/26/15

July 27, 2015

There were four posts yesterday.  The first was “A Note on Medicare Costs:”

Medicare is about to turn 50, and while it has brought immense benefits, it has also cost a lot of money. Why? Is it the general rise in health care spending, or some specific government-related inability to limit outlays?

Well, there’s a simple answer from the Centers for Medicare and Medicaid historical expenditure data, which among other things offers a comparison between Medicare spending per beneficiary and premiums on private health insurance. Medicare has expanded the range of things it covers, so what you want is the “common benefits” comparison that adjusts for this. And what it shows is that except during a brief period in the 1990s, as HMOs spread, cost growth has consistently been slower in Medicare than in the private sector.


Centers for Medicare and Medicaid Services

Yesterday’s second post was “Thorstein Veblen in Brooklyn (Trivial):”

I went to another Celebrate Brooklyn concert in Prospect Park last night, and had a very good time — although the usual close-up seating where you can really see the performers was given over to a throng of standing dancers, and while I may be a wannabe hipster I’m not going that far. But anyway, music aside, one thing I enjoy about these events is crowd-watching, which varies a lot by performer. Lucius was a real all-ages, all-subcultures crowd, ranging from enthusiastic teenagers to fairly sedate but equally enthusiastic senior citizens. Sylvan Esso was very hipster — which is fine; de gustibus non whatever.

I did, however, find myself wondering a bit about the economics. I’m perfectly OK with topknots and tattoos, but obviously a lot of employers won’t be. So where do all these people work? They can’t all be baristas …

But that, surely, is part of the point. Probably not an original observation, but surely one main goal of personal styling is to make it clear that the person so styled is not, in fact, part of the workaday bourgeois world, that he or she doesn’t work at a 9-5 office job during the week and put on trendy attire for the weekend. It has to be a cultural version of Veblen’s conspicuous consumption, where the point is not to display your wealth but instead to display your indie cred.

Again, I’m fine with it — and the scene is producing a lot of music I really like, so it’s all good. But sometimes I just can’t turn off my inner econonerd.

The third post yesterday was “The Disappearing Entitlements Crisis:”

A few years back elite policy discourse in the United States was totally dominated by the supposed entitlements crisis. Serious people all assured each other that history’s greatest menace was the threat posed by the unstoppable growth of Medicaremedicaidandsocialsecurity, which could only be tamed by dismantling the legacy of the New Deal and the Great Society, while of course cutting top marginal tax rates.

A few of us argued, however, not just that it was foolish to worry about long-run budget issues in a time of depression and zero interest rates, but that the long run fiscal problems weren’t really that intractable. I used to say that all we needed were death panels and sales taxes — that if we got serious about cost control on health care, the rise in entitlement spending due to an aging population would shrink to a level that could be covered by moderate increases in revenue, meaning that no fundamental dismantling of the welfare state was necessary.

Sure enough, health spending began moderating after the passage of the ACA — and as Bruce Webb points out, if you believe the reports of the Social Security and Medicare trustees, we’re basically already there.

In 2009 the Trustees projected a gigantic rise in Medicare spending, which was obviously unsupportable (although Social Security never looked like a big problem).

The view from 2009
The view from 2009

But in the most recent report most of that projected rise has gone away.

The view from 2015
The view from 2015

Bear in mind that the current US budget deficit is below the level at which the debt/GDP ratio can be stabilized, in other words poses no problem. Looking forward, population aging will expand that deficit by a few percent of GDP, but that’s well within the range that could be closed with moderate tax hikes, cuts in pointless military spending, etc.. Nor is there a big rush: nothing terrible will happen if we don’t immediately decide how we’ll pay for projected benefits in the year 2050.

The truth is that there never was an entitlements crisis. But now there isn’t even an excuse for pretending that such a crisis exists. I know that a large part of the commentariat is professionally and personally invested in fiscal crisis rhetoric — admitting that it’s no longer relevant would suggest that they have, all along, been silly rather than Serious. But next time you see someone solemnly intoning that we must destroy Medicare to save it, remember that there is no there there.

Yesterday’s last post was “Tattoos, Incompetence, and the Heritage Foundation:”

Henry Farrell — who recently said some very interesting things about Very Serious People — writes me about my musings on hipster style, and refers me to a review of a book on codes of the underworld. The book notes that tattoos and such play a role as signals of criminal identity, which work precisely because they make it hard to participate in non-criminal society.

But there’s more: criminals actively cultivate a reputation for incompetence at non-criminal business, designed to reassure both their colleagues and the victims of their extortion that they won’t break their implicit contracts by going legit. And the author, Diego Gambetta, adds a wonderful parallel: according to his account, Italian academics, who do a lot of horse-trading in appointments etc., cultivate a reputation for incompetence at actual research, again designed to reassure those with whom one deals:

“Being incompetent and displaying it,” he writes, “conveys the message I will not run away, for I have no strong legs to run anywhere else. In a corrupt academic market, being good at and interested in one’s own research, by contrast, signal a potential for a career independent of corrupt reciprocity…. In the Italian academic world, the kakistrocrats are those who best assure others by displaying, through lack of competence and lack of interest in research, that they will comply with the pacts.”

And this immediately makes me think of one of the mysteries of economic “debate” in America, namely the preference of the right not just for hacks but for incompetent hacks. Here’s what I wrote:

I suspect that the incompetence is actually desirable at some level — a smart hack might turn honest, or something,

But let me hasten to add that I am not intending to engage in slander here. I would never, never suggest that Brooklyn hipsters are anything like Heritage Foundation economists.

Krugman’s blog, 7/23/15

July 24, 2015

There were three posts yesterday.  The first was “The Village, the Base, and St. John:”

So, over the weekend we were told that our pass the popcorn moment — I mean, our long national nightmare — was over: Donald Trump would implode now that he had dared to question John McCain’s heroism.

But lo and behold, he’s still hanging on to front-runner status for the Republican nomination. How is that possible?

The short answer, surely, is that the inside-the-Beltway crowd — not for the first time — confused its own perceptions with those of actual voters.

Inside the Village, McCain is a sacred figure; he is still, after all these years of being a conventional ideologue, perceived as being McCain the Maverick; he is still seen as a wise man on national security despite his warmongering; he’s virtually a constant presence on the Sunday talk shows. So the villagers expected everyone to recoil in horror when Trump ridiculed his war record — you’re only supposed to do that to Democrats.

But the Republican base really doesn’t care very much. Whatever they may say, its members don’t really care about military heroism — it’s not just the treatment of John Kerry, think about how little they seemed to care when we finally did get Osama. And they really, really don’t care about some old guy who lost an election.

Trump surely hurt himself a bit with his McCain attack, but he still embodies the base’s id in a way the Village doesn’t seem to understand.

Yesterday’s second post was “SPQR And All That:”

It’s been a rough few weeks, so I’ve been taking refuge in the past: I brought Adrian Goldsworthy’s The Fall of Carthage along on recent travels. And I found it revelatory; it shook some views I’ve long held about history.

You see, I have or had a pretty firm, cynical but I thought well-grounded model of pre-industrial civilization. All pre-industrial societies, I thought, were Malthusian, with the bulk of the population living at the edge of subsistence. The fruits of civilization went only to a small elite, 5 or 10 percent of the population at most, which essentially lived on resources extorted from the peasantry. For everyone else, it didn’t matter who ruled or how; politics, national or cultural concerns, whatever, were internal squabbles among the extractive classes.

This model still seems to me to be pretty good for the Roman Empire. But at least as Goldsworthy describes it, the Roman Republic at the time of the Punic Wars was something very different. It beat Carthage not so much through military prowess as through social solidarity: not only had Rome managed to assimilate many peoples and turn them into citizens or very loyal allies, it seems to have inspired strong commitment from a large fraction of the population. This gave it a huge advantage over Carthage in terms of military manpower, and also the durability that allowed it to absorb terrible defeats and keep on fighting.

Are there any other examples in history like this? And how did they do it? What was special about the Roman political and/or social system that produced this kind of solidarity?

Of course, it didn’t last — the very conquests made possible by thevirtus of the Republic eventually produced vast latifundia worked by slaves and undermined all the old values; Rome became a more or less standard preindustrial empire. But it wasn’t always. Why?

Yesterday’s last post was “The Essential Obstfeld:”

Olivier Blanchard, who has to have been one of the most influential chief economists ever at the IMF, is retiring; Maury Obstfeld will be his replacement. Intellectually, there’s a lot of continuity: one New Keynesian MIT PhD I know very well replaced with another New Keynesian MIT PhD with whom I co-authored a text now in 10th edition. Still, I hope people are interested in Maury’s contributions to economics. And it seems to me that there are two papers in particular that are very relevant.

First is his work on self-fulfilling currency crises. The early currency-crisis literature, which I founded back in 1979, was about countries trying to peg their currency while following policies that would ultimately make that peg unsustainable; the question then became when speculators would force the inevitable. Maury, however, inspired by the ERM crisis of 1992-3, argued that crises could come out of a clear blue sky — that countries could face a speculative attack that would force them off a peg that would otherwise have been indefinitely sustainable.

By the way, I was at first very skeptical of this argument. But the events of the Asian crisis a few years later convinced me that I was wrong and Maury was right. And here’s the thing: the Obstfeld approach seems highly relevant to the troubles of eurozone countries, and also helps explain why Mario Draghi’s “whatever it takes” worked so well.

Second was his work with Ken Rogoff on open-economy macro, basically bringing New Keynesian modeling to floating exchange rates. One really important aspect of this work, as it turned out, was that in building a bridge to the classic literature here, O-R considered the effects of fiscal as well as monetary policy. As a result, those of us who were well versed in open-economy macroeconomics were fully prepared when issues of fiscal stimulus arose, and didn’t fall into the traps of incomprehension we saw from so many domestic-economy macro types.

There is, of course, much more in the Obstfeld canon. But those two seminal papers seem to me to illustrate why he’s so perfect for this job, and why one can expect Maury to give very good advice, whether policymakers take it or not.

Krugman’s blog, 7/22/15

July 23, 2015

There were two posts yesterday.  The first was “The Half-Lives of Others (Wonkish):”

What about Ireland? That’s what some people have been asking me; they’re under the impression that Ireland is a success story for austerity, and that this success is somehow a refutation of the broadly Keynesian account of the economy I’ve been giving. So I guess some clarification is in order.

As it happens, Simon Wren-Lewis has recently taken this very question on, and in a way I don’t have much to add. But maybe it will help to say more or less the same thing, but differently.

First of all, Ireland is a success only in a relative sense. Yes, it has done better than Greece, but it suffered a prolonged, very severe slump. It is growing again, finally — but that doesn’t undo the reality of a large price paid to get to this point.

Still, it is growing, and fairly fast at this point. Isn’t this something that wasn’t supposed to happen? Actually, no. If you apply a textbook Keynesian model – literally, the one in the best-selling international text, which happens to be Krugman, Melitz, and Obstfeld – it tells a story that looks a lot like Irish experience.

That textbook model can be described with the three equations shown, in which all variables are shown as deviations from their long-run equilibrium. First, the output gap y is determined via a multiplier effect by the structural budget balance B and the level of net exports NX. Second, net exports are determined by the real exchange rate; if we take the nominal exchange rate as given (e.g., if you’re on the euro), and also take foreign prices as given, this is determined by the domestic price level p. Finally, we have a rudimentary Phillips curve, in which the rate of inflation depends on the output gap.

Taken together, these imply the fourth equation, which shows how output self-corrects over time. In words: if the economy is depressed, it will experience deflation, perhaps absolute but in any case relative to its trading partners; this will gradually improve competitiveness, causing next exports to rise and the economy to converge back to normal. The rate of convergence will depend on three parameters: the multiplier, the sensitivity of the trade balance to the real exchange rate, and the sensitivity of inflation to the output gap.

I’ve written down some plausible guesses about these three parameters; they imply that the process of internal devaluation will, left to itself, correct 22.5 percent of an output gap over the course of a year. Alternatively, they imply that the half-life of a deviation of output from potential will be a little over three years.

But, you say, we’re more than 5 years into the euro crisis. Shouldn’t it be mostly gone? No, because austerity wasn’t put into effect all at once. Instead, countries faced several years of fiscal consolidation before there was a pause that permitted growth to resume.

The figure shows a hypothetical example that is meant as a sort of stylized Ireland. I assume that a fiscal tightening equal to 6 percent of potential GDP takes place over the course of three years; the cyclically adjusted balance then stabilizes, with no further tightening. What you see is a large economic downturn as long as the screws are being tightened, but a significant recovery once this stops. Again, this is just standard Keynesian open-economy macro: over time a depressed economy gains competitiveness, so that in the long run recovery happens. But in the long run …

Yesterday’s second post was “Annoying Euro Apologetics:”

Are there good arguments against the proposition that the creation of the euro was an epic mistake? Maybe. But the arguments I’ve been hearing lately are really bad. And they’re also deeply annoying.

One argument I keep seeing is that economist critics like myself don’t understand that the euro was a political and strategic project, not merely a matter of economic costs and benefits. Yes, I’m a dumb uncouth economist, completely unaware of the role of politics and international strategy in policy decisions, who never heard of the European project and its origins in the effort to put Europe’s legacy of war behind it, not to mention strengthen democracy in the Cold War.

Well, actually I do know all about that. The point, however, is that while the European project has at every stage combined economic objectives with broader political goals – it’s about peace and democracy through integration and prosperity – the project can’t be expected to work unless the economic measures are a good idea in and of themselves, or at least a non-catastrophic idea. What happened in the march to the euro was that European elites, in love with the symbolism of a single currency, closed their minds to warnings that currency union – unlike the removal of trade barriers – was at best ambiguous in its economic logic, and arguably, even ex ante, a very bad idea indeed.

An alternative argument, which we’re hearing from depressed European economies like Finland, is that the short-term costs of inflexibility are outweighed by the supposedly huge gains from greater integration. But where’s the evidence for these huge gains? In this article, they’re said to be demonstrated by Finland’s strong growth before the recent crisis. But is it plausible to give credit for the Nokia boom to the single currency?

Well, the chart shows a comparison I find interesting, between Finland and its neighbor Sweden, where a referendum in 2003 rejected euro membership. (I remember that vote: Swedish friends who shared my worries about the euro phoned me in the middle of the night to celebrate.) For both countries I use 1989 as a baseline; that was the year before the great Scandinavian slump of the 1990s, brought on by runaway banks and a huge housing bubble.


Total economy database

After that slump, Finland experienced a long stretch of solid economic growth. But so did Sweden, and it’s hard to see any real difference in their degrees of success. There’s certainly nothing there to indicate that euro membership was crucial to growth. Since 2008, on the other hand, Sweden has – despite bobbling its monetary policy – done much better.

As I said, maybe there are good arguments against the proposition that the euro was a mistake. But pointing out that politics matters, and economies grow, doesn’t cut it; these aren’t the factoids you’re looking for.

Krugman’s blog, 7/20/15

July 21, 2015

There was one post yesterday, “Undebasing the Dollar:”

Remember when the likes of Paul Ryan accused Ben Bernanke of printing too much money, solemnly intoning that “There is nothing more insidious that a country can do to its citizens than debase its currency”? A big part of the justification for this fear-mongering was that commodity prices were rising sharply from their 2009 low, which the usual suspects claimed was a harbinger of rising overall inflation.

So, look at what’s been happening to commodity prices, including gold, recently.

Does this mean that deflation looms? Is it time to demand that Janet Yellen roll the printing presses?

I mean, it could be that the inflation hawks have learned their lesson, that they realize that volatile commodity prices aren’t a very good guide to policy, and that it makes sense to focus on core inflation. But I’ve seen no sign of a rethink.

Or it could be that inflation phobia is deep pure and simple, and no evidence will shake the state of perm-fear.

Krugman’s blog, 7/19/15

July 20, 2015

He didn’t post to his blog on Saturday, and there were two posts yesterday.  The first was “Southern Exposure:”

Sorry about blog silence — real life has intruded. And travel over the next few days, so limited blogging.

Last week I did make it to Columbus Circle to do Fareed Zakaria, plus a web extra on Puerto Rico and why it isn’t Greece.

Yesterday’s second post was “The Euroskeptic Vindication:”

One theme I’ve returned to often in this blog is that far from failing in the crisis, more or less conventional Hicks/Keynes macroeconomics — whether or not you dress it up in New Keynesian algebra — has performed very well. The quiescence of interest rates and inflation despite large budget deficits and huge increases in the monetary base, the strong negative correlation between fiscal austerity and growth, all have been just what someone who knew his or her IS-LM and took it seriously would have predicted. Anti-Keynesians keep making more or less desperate efforts to refute this proposition, usually by taking something I said out of context and pretending that something that happened for one year somewhere or other is contrary to what the Evil One claimed. But the overall shape of events has been very Keynesian, and very much at odds with alternative stories.

And at this point I think we need to chalk up another success.

Bloomberg had a piece trying to find a small group of heroic iconoclasts who predicted the euro crisis. But as David Beckworthrightly points out, many American economists warned about exactly the flaws in the euro that are now the source of so much suffering. Beckworth reminds us of a January 2010 article by Jonung and Drea that has become an accidental classic. Their intent was to mock U.S. economists who were negative on the euro and were made to look foolish by its success; to that end they provided an impressive bibliography and literature review of academic euroskepticism — and in so doing provided us with a sort of honor roll, because all the dire warnings from those ugly Americans came to pass within months of their article’s publication.

So why were the ugly Americans right? Because the theory ofoptimum currency areas turns out to be basically right. And that theory is best seen, I’d argue, as an application of the same Hicks/Keynes style of analysis that has worked so well on interest, inflation, and austerity.

All in all, the past 7 years have been a very good time for old-fashioned macroeconomics. But of course nothing will make the Germans, or the U.S. right, concede that Keynesian ideas have worked.

Krugman’s blog, 7/17/15

July 18, 2015

There were three posts yesterday.  The first was “Eternal Greece:”

Matt O’Brien directs us to a Heritage Foundation economist presenting what is portrayed as a startling idea: America could become Greece! And it’s true — there probably haven’t been more than a few thousand articles issuing the same warning in the five (5) years since Alan Greenspan published “US Debt and the Greek Analogy“, with this immortal complaint:

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

But Matt misses the truly wonderful part about the latest from Heritage, which is why we should be worried about turning into Greece:

Diverse academic research shows that economic growth slows significantly at high levels of public debt. Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff, as well as Manmohan S. Kumar, Jaejoon Woo, Stephen Cecchetti, Madhusudan Mohanty and Fabrizio Zampolli, report that advanced economies with high levels of debt (85-90 percent of GDP and higher) grow more slowly annually than their lower-debt counterparts.

You might think that debt worriers would try to put the whole 90-percent debacle behind them — not just the Excel error and the extreme sensitivity of the results to odd data choices, but the strong suggestion that whatever debt-growth correlation is left mainly reflects causation from growth to debt and not the other way around. But I heard the same thing at Freedomfest: either these people never heard about the R-R crash-and-burn, or they hope their readers haven’t.

More broadly, I’ve noted in other contexts that the right never gives up an argument. You see this on Obamacare: the usual suspects are still claiming that the ACA didn’t really reduce the number of uninsured, that there has been a massive rate shock, that it’s creating a giant hole in the budget, etc., even in the face of sharply dropping uninsurance, moderate rate hikes, and below-prediction costs. They add new arguments, but the old ones never go away no matter how ludicrously wrong they’ve proved.

Yesterday’s second post was “Bernanke Isn’t Serious:”

By which I mean that he isn’t Serious. His latest on Greece and the euro suggests that the deeper problems lie not in Greek fecklessness but in the refusal of the core — basically Germany — to allow either monetary or fiscal policies that would offset the downdraft from austerity in the periphery. He even questions the sacred status of “structural reform”:

The slow recovery from the crisis of the euro zone as a whole is the result, among other factors, of (1) political resistance that delayed by many years the implementation of sufficiently aggressive monetary policies by the European Central Bank; (2) excessively tight fiscal policies, especially in countries like Germany that have some amount of “fiscal space” and thus no immediate need to tighten their belts; and (3) delays in taking the necessary steps, analogous to the banking “stress tests” in the United States in the spring of 2009, to restore confidence in the banking system. I would not, by the way, put “structural rigidities” very high on this list. Structural reforms are important for long-run growth, but cost-saving measures are less relevant when many workers are already idle; moreover, structural problems have existed in Europe for a long time and so can’t explain recent declines in performance.

Does all this sound sort of … familiar? Kind of like what other bearded Anglo-Saxon economists have been saying? As I’ve tried to point out for a long time, in this policy debate the supposedly radical types are the ones doing standard, more or less textbook economics, while the respectable voices have subscribed to fantasies ungrounded in either history or theory.

You might think that having one of history’s most celebrated central bankers weigh in on the anti-austerity side of the issue would change perceptions about what’s serious as opposed to Serious. But don’t bet on it.

The last post yesterday was “Trumpism:”

Not surprisingly, Rick Perlstein, our foremost expert on the rise of movement conservatism, has the best take so far on the Trump phenomenon. As he says, nobody should be surprised to find that there are a lot of Republicans who are mad as hell and won’t take it any more:

This is important: conservatism is like bigotry whack-a-mole. The quantity of hatred, best I can tell from 17 years of close study of 60 years of right-wing history, remains the same. Removing the flag of the Confederacy, raising the flag of immigrant hating: the former doesn’t spell some new Jerusalem of tolerance; the latter doesn’t mean that conservatism’s racism has finally been revealed for all to see.

And crucially, it’s a key part of conservative mythology that the silent majority shares this hatred, that it’s only the liberal elite with its political correctness keeping Americans from saying what they know to be true. (It’s like the constant trope from the likes of Bill O’Relly that anyone who disagrees with him is a “far-left” type, no matter how mainstream their ideas.)

So why shouldn’t they rally around The Donald? The elite considers him ridiculous, but the base has been told again and again that the elite is corrupt and anti-American. The base has also been told again and again that it represents the true views of everyone except Those People. So why shouldn’t they go with someone who is their kind of guy, in style as well as substance?

Krugman’s blog, 7/15/15

July 16, 2015

There were three posts yesterday.  The first was “Angry Germans:”

Jacob Soll writes about the destructive anger he saw at a German conference on euro issues; I can second that observation.

You see, I’ve been getting a lot of mail from Germany lately, in a break from (or actually an addition to) my usual deluge of right-wing hate mail. I’m well aware that this is a highly distorted sample, since I’m only hearing from those angry enough and irrational enough — seriously, what do the writers expect to accomplish? — to send such things. Still, the content of the correspondence is striking.

Basically, the incoming missives take two forms:

1. Obscenities, in both English and German

2. Bitter accusations of persecution, along the lines of “As a Jew you should know the dangers of demonizing a people.” Because criticizing a nation’s economic ideology is just like declaring its people subhuman.

Again, these are letter-writers, and hardly representative. But Germany’s sense of victimization does seem real, and is a big problem for its neighbors.

Yesterday’s second post was “An Unsustainable Position:”

Everyone is talking about the IMF’s new update to its debt sustainability analysis, which says that Greece’s attempt to surrender is doomed to failure without massive debt relief. That’s surely the right conclusion.

However, it’s hard to accept the document’s claim that this is a new development, the result of the banking crisis of the past two weeks plus the economic troubles since Syriza came to power. If the original plan for Greece made any sense, whatever damage has been done recently should be largely reversible: restore liquidity to the banks, establish a government of faithocrats who restore confidence, and debt should end up peaking only a few percentage points of GDP higher than previously predicted. That is, even if you accuse Syriza of botching things terribly, no economic analysis I know of says that a few months of misgovernment permanently damage a country’s growth prospects.

The point, surely, is that the plan for Greece was never feasible. No matter how willing a nation is to suffer, no matter how willing to run primary surpluses on a scale that is very rare in history, trying to pay off high debt through austerity without any kind of monetary offset is basically a recipe for debt deflation and failure. This is, in fact, what the IMF’s own research has said.

And the return to growth last year would have turned out to be a false dawn even without the political crisis. That slight uptick largely reflected a pause in austerity — and would have gone away regardless as the troika resumed tightening the fiscal vise.

So it’s good to see the IMF being realistic here, but the institution remains unwilling to face up fully to past errors — which matters, because these past errors are prologue to the doom that faces any attempt to stay the course.

“Stay the course” is a phrase that should have been stricken from the English language years ago…  The last post yesterday was “History Lessons for Euro Debtors:”

When the financial crisis struck, there were widespread calls for new economic thinking; surely, many believed, the drastic events showed that there was something terribly flawed about economic analysis. In fact, however, the crisis itself, and even more the developments that followed, have been anything but puzzling. Again and again, things have played out pretty much the way you would have expected if you (a) understood and took seriously basic Hicks/Keynes macroeconomics and (b) paid attention to the relevant economic history.

The problem has been that all too many policymakers and pundits were and are either ignorant of these basics or determined to ignore them — or, putting these together, determined to be ignorant. Year after year, as we reproduce the 1930s, the usual suspects have been obsessed with fears of a return to the 1970s; as we become Japan they worry that we’re about to become Zimbabwe; and so on.

So, on the issue of the moment, there are actually quite good historical models for what Greece has been trying to do — cope with a large debt overhang via austerity policy. Britain, after all, emerged from each world war with very high public debt. Its debt burden just after World War I was, as a share of GDP, roughly comparable to Greece’s in 2009; its burden after World War II was twice as high.

What happened? Almost three years have passed since the IMF — yes, the IMF — pointed out that Britain between the wars tried a strategy much like that of European debtors: hard money plus austerity. Britain was incredibly determined, running huge primary surpluses as a share of GDP; but it failed to make a significant dent in the debt burden, because deflation ate up any gains from fiscal austerity:


Bank of England and IMF

The story after World War II was very different. While Britain did run primary surpluses, they were for the most part considerably smaller than after World War I. But the debt ratio fell dramatically, because of the combination of inflation and financial repression that helped keep interest rates low:


Bank of England and IMF

The secret of Britain’s success the second time around? After World War I it returned to the gold standard; while it did eventually let the pound fall, at that point this mainly was just sufficient to offset global deflation in the face of the Great Depression. After World War II Britain faced a world economy with rising prices, but nonetheless sharply devalued the pound in 1949:


Bank of England

What, in this history, would lead anyone to believe that the troika’s policies for Greece had any chance of succeeding?

Now what? If Greece still had its own currency, the case for devaluation would be completely overwhelming at this point. What this means, in turn, is that everything — the ongoing economic disaster in Greece, the bitter divisions within the euro area, the perplexity of even the best intentioned policymakers — flows from the supposedly insuperable technical difficulties of going off the euro.

Can this possibly make sense given the extremity of the situation?

Krugman’s blog, 7/14/15

July 15, 2015

There were four posts on Bastille Day.  The first was “The Face of the Base:”

Joe Weisenthal asked me why Donald Trump is riding so high in the polls; as he said, my answer was subtle and nuanced.

But seriously, why is anyone surprised? Year after year the GOP base has been fed fantasies about death panels, senior figures have flirted with birtherism and routinely peddled conspiracy theories whenever good news arrives about health reform or the economy, a centrist president has been portrayed as a socialist who hates America, sitting governors have deferred to craziness over military exercises. Oh, and the unemployed have been blamed for their own plight, food stamp recipients and the disabled portrayed as malingerers. Then along comes Trump, who embodies the base’s values, its intellectual outlook, its deep lack of empathy for the unfortunate. And up goes the cry: “Don’t base voters realize that he’s not a serious figure?”

Yesterday’s second post was “Faithocrats:”

One of the ideas floating around in the aftermath of the sack of Athens has been that of, in effect, deposing Syriza from outside and installing a “technocratic” government. It wouldn’t be the first time in this dismal saga, and I won’t be surprised if it happens, for a few months anyway.

But let me note, as I have before, that what Europe calls technocrats aren’t people who know how the world works; they’re people who subscribe to the approved fantasies, and never change their minds no matter how badly wrong things go. Despite the overwhelming evidence that austerity has exactly the dire effects basic textbook macro says it will, they cling to belief in the confidence fairy. Despite a striking lack of evidence that “structural reform” delivers much of a growth boost, especially in an economy suffering from a huge output gap, they continue to present structural reform — mainly in the form of disempowering workers — as a sovereign remedy for all ills. Despite a clear record of past failure, they continue to push for asset sales as a supposed answer to debt overhang.

In short, what Europe usually means by a “technocrat” is a Very Serious Person, someone distinguished by his faith in received orthodoxy no matter the evidence. It’s as Keynes said:

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

And it looks as if there’s a lot more failing conventionally in Europe’s future.

The third post yesterday was “The Pause of 2014:”

Part of the background to the sack of Athens is the widespread belief among Europe’s austerians that, despite everything that has happened, they are in the process of being vindicated. After all, growth has resumed in the GIIPS countries – in fact, even Greece was growing until Syriza came to power and scared away the confidence fairy.

Now, many of us took on similar claims in the UK – and quickly noted that a large part of the story behind the resumption of British growth in 2013-2014 was actually a pause in fiscal consolidation. Confusion between levels and rates of change is endemic here — actually, it’s just amazing how much discussion of macroeconomics since the crisis is nonsense because people who imagine themselves sophisticated are muddled about the difference between levels and changes. But the models are completely clear: the rate of growth of GDP should depend on the change in the structural budget balance. So you would expect GDP growth to pick up, other things equal, if there is a slowdown in the pace of tightening even if austerity isn’t actually reversed.

So how does the story of the GIIPS fit into this analysis? Exhibit 1 shows the overall stance of fiscal policy in the GIIPS, using the IMF’s estimate of the structural budget balance as a share of potential GDP — an imperfect measure, but good enough, I think, to make the point. To get a single number I weight countries by their 2009 PPP GDP, also from the IMF. The story is clear: rapid, drastic tightening from 2009 to 2013, but a standstill in 2014. A revival of growth in 2014 is therefore no surprise — and it actually supports the Keynesian story, rather than refuting it.

Exhibit 1
Exhibit 1

Exhibit 2 shows things a bit differently, with more detail. Each point in the scatterplot represents an individual GIIPS country in a given year, with the horizontal axis showing the change in the structural balance — effectively, the additional austerity imposed in that year — and the vertical axis representing the rate of growth. As usual, we see a clear negative association, consistent with a Keynesian story.

Exhibit 2
Exhibit 2

In addition to the usual scatter, however, I have marked the observations for 2014 in red. As you can see, 2014 was a year of modest growth for all of the countries; it was also a year in which fiscal consolidation was effectively put on hold. And the outcomes were well within a range consistent with the previous austerity-growth relationship.

So is there anything at all here suggesting that it’s OK to impose further fiscal tightening on Greece, that this won’t deepen its depression? For that matter, does Greece even stand out as having done worse than you would expect given the incredibly harsh fiscal adjustment? No and no.

The last post yesterday was “Invisible Green Triumphs:”

Like a number of commentators, I’ve been struck by how people on the right know, just know, that Obamacare has been a dismal failure. More than 15 million Americans have gained coverage, costs are well below predictions, and employment growth has accelerated since the “job-killing” law went into effect — but they know none of that, because all they hear from their preferred information sources is tales of disaster.

Some things I’ve been reading lately remind me that there’s another major Obama initiative that is the subject of similar delusions: the promotion of green energy. Everyone on the right knows that the stimulus-linked efforts to promote solar and wind were a bust — Solyndra! Solyndra! Benghazi! — and in general they still seem to regard renewables as hippie-dippy stuff that will never go anywhere.

So it comes as something of a shock when you look at the actual data, and discover that solar and wind energy consumption has tripled under Obama.


Energy Information Administration

True, it started from a low base, but green energy is no longer a marginal factor — and with solar panels experiencing Moore’s Law-type cost declines, we’re looking at a real transformation looking forward.

You can argue about how much this transformation owes to federal policy. But only a combination of rigid preconceptions and sheer ignorance can explain the way right-wingers still go around sniggering about Obama’s green-energy promotion. Far from being a bust, that policy was at least a contributing factor to an energy revolution.

Sorry about the delay in posting this, but my ‘puter developed a bad case of the gremlins earlier.  Thank the FSM rebooting it helped…

Krugman’s blog, 7/13/15

July 14, 2015

There was one post yesterday, “Roach Motel Economics:”

So we have learned that the euro is a Roach Motel — once you go in, you can never get out. And once inside you are at the mercy of those who can pull your financing and crash your banking system unless you toe the line.

I and many others have had a lot to say about the politics of this reality. But let me say a word about the economic implications for the euro area as a whole — which are basically that Europe has created a system that treats surplus and deficit countries asymmetrically, even more than the classical gold standard, and leads to a severe deflationary bias.

This is true both for fiscal issues and for balance of payments issues. Debtors are forced into draconian austerity, while creditors face no pressure to reflate; economic crisis, which should be met with expansionary policy, instead leads to contraction because of this asymmetry. Meanwhile, countries that find themselves overvalued are forced to deflate in an effort to regain competitiveness, while undervalued counties face no pressure to help out with a higher inflation rate — so at times of major misalignment, when moderate inflation can help, the overall effect is declining inflation and maybe even deflation.

And we’re talking about huge costs here. Look at the crude Phillips curve I estimated for Greece a few days back, shown in the chart.

It suggests that it takes about 4 point-years of output gap to reduce prices relative to baseline by 1 percentage point. So suppose that you are 25 percent overvalued, and get no help from higher inflation in the core. Then “internal devaluation” requires sacrificing around 100 percent of a year’s GDP. Let’s repeat that: given what we now know about the rules of the game, countries as overvalued as much of the European periphery became thanks to the lending boom are supposed to sacrifice a full year’s economic output as part of a process of beating prices and wages down.

Now more than ever, the euro looks like a terrible idea.


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