Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 10/9/15

October 10, 2015

There was one post yesterday, “Memories of Con Jobs Past:”

As the Paul Ryan clamor gets louder, a public service reminder: he’s a con man.

I don’t mean that I disagree with his policy ideas, although I do. I mean that his reputation as a serious thinker is based on deception, both about what he has actually proposed and how it has or hasn’t been vetted.

Take, for example, the famous “fiscally responsible” budget plan. As I explained way back when, what Ryan did was to present a sort of vague fiscal outline to the Congressional Budget Office that envisioned implausibly large cuts in spending and mysterious increases in revenue, and stipulated for the purpose of the exercise that CBO take those numbers as given. The budget office hinted broadly in its report that it didn’t believe any of it, e.g.:

That combination of other mandatory and discretionary spending was specified to decline from 12 percent of GDP in 2010 to about 6 percent in 2021 and then move in line with the GDP price deflator beginning in 2022, which would generate a further decline relative to GDP.No proposals were specified that would generate that path. [My italics]

But CBO did the numbers as required — and then the Ryan plan was presented as something that the budget office had “vetted”, when it did no such thing.

And as I’ve said, Ryan is to budget analysis as Carly Fiorina is to corporate leadership: he’s brilliant at self-promotion, but there’s no hint that he’s actually able to do the job. There is, in particular, no example I know of where he’s actually been right about anything involving budgets or economics, and some remarkable examples — like his inflation screeds — of being completely wrong, and learning nothing from the experience.

So is this really the GOP can do? And the answer, sad to say, is that it probably is.

Krugman’s blog, 10/8/15

October 9, 2015

There were three posts yesterday.  The first was “The China Debt Fizzle:”

Remember the dire threat posed by our financial dependence on China? A few years ago it was all over the media, generally stated not as a hypothesis but as a fact. Obviously, terrible things would happen if China stopped buying our debt, or worse yet, started to sell off its holdings. Interest rates would soar and the U.S economy would plunge, right? Indeed, that great monetary expert Admiral Mullen was widely quoted as declaring that debt was our biggest security threat. Anyone who suggested that we didn’t actually need to worry about a China selloff was considered weird and irresponsible.

Well, don’t tell anyone, but the much-feared event is happening now. As China tries to prop up the yuan in the face of capital flight, it’s selling lots of U.S. debt; so are other emerging markets. And the effect on U.S. interest rates so far has been … nothing.

Who could have predicted such a thing? Well, me. And not just me: anyone who seriously thought through the economics of the situation, with the world awash in excess saving and the U.S. in a liquidity trap, quickly realized that the whole China-debt scare story was nonsense. But as I said, this wasn’t even reported as a debate; the threat of Chinese debt holdings was reported as fact.

And of course those who got this completely wrong have learned nothing from the experience.

The second post yesterday was “Prudence is Folly:”

Larry Summers calls for fiscal expansion, and rails (though he doesn’t use the term) against the Very Serious People, denouncing the fixation on structural reform:

Traditional approaches of focusing on sound government finance, increased supply potential and the avoidance of inflation court disaster … It is an irony of today’s secular stagnation that what is conventionally regarded as imprudent offers the only prudent way forward.

Quite. It’s now seven years since I warned that we had entered a world in which

virtue becomes vice, caution is risky and prudence is folly.

And we’re still in that world. I’m really glad to see Larry saying similar things, buttressed by the growing evidence that we’re facing a secular lack of adequate demand. I wish I believed it would matter.

Yesterday’s last post was “Flimflam Fever:”

Apparently desperate Republicans are pleading with Paul Ryan to become Speaker of the House, because he’s “super, super smart.” More than anyone else in his caucus, he has the reputation of being a brilliant policy wonk.

And that tells you even more about the dire state of the GOP. After all, Ryan is to policy wonkery what Carly Fiorina is to corporate management: brilliant at selling himself, hopeless at actually doing the job. Lest we forget, his much-vaunted budget plan proved, on even superficial examination, to be a ludicrous mess of magic asterisks. His big contribution to discussion of economic policy was his stern warning to Ben Bernanke that quantitative easing would “debase the dollar”, that rising commodity prices in early 2011 presaged a surge in inflation. This guy’s delusions of expertise should be considered funny.

Yet he may indeed be the best they have.

Nonetheless, it would be a huge mistake for him personally to take the job. Where he is, he can cultivate his wonk image, with nobody in the press willing to disturb the illusion. In a direct leadership role, he’d have no place to hide.

Krugman’s blog, 10/7/15

October 8, 2015

There was one post yesterday, “Did The Fed Save The World?”:

I’m only part way into Ben Bernanke’s book, but I wanted to play devil’s advocate about the book’s central thesis — not to criticize BB, or question the job he did, but as a way to provoke thought about what lessons we should learn from the crisis of 2008.

Bernanke’s basic theme is that the shocks of 2008 were bad enough that we could have had a full replay of the Great Depression; the reason we didn’t was that in the 30s central banks just sat immobilized while the financial system crashed, but this time they went all out to keep markets working. Should we believe this?

It’s not a hard story to tell — and I very much agree with BB that pulling out all the stops was the right thing to do. You don’t play games at such times.

But I’m not persuaded that the real difference between 2008 and 1930-31 (which is when the Depression turned Great) lies in central bank action, or related bailouts.

It’s true that the 30s were marked by a big financial disruption; one measure (which I learned from Bernanke’s academic work) is the soaring spread between slightly risky corporate bonds and government debt:

But there was also a big financial disruption in 2008-2009, in fact comparable in size by this measure:

It didn’t last as long, but that may be as much effect as cause of the failure to experience a full-blown depression.

Why was the disruption so large despite the bailouts and emergency lending? Well, banks by and large didn’t collapse, but shadow banking rapidly shriveled up, with repo and other alternatives to bank financing shrinking very fast; liquidity for everything but the safest of assets disappeared even though the big financial firms remained in being.

And if we’re looking for effects of the tightening in credit conditions, remember that credit policy usually exerts its biggest effects through housing — and housing investment fell more than 60 percent as a share of GDP:

Even a total collapse of home lending couldn’t have subtracted more than a point or two more off aggregate demand.

So really, was putting a limit on the financial crisis the reason we didn’t do a full 1930s? Or was it something else?

And there is one other big difference between the world in 2008 and the world in 1930: big government. Not so much deliberate stimulus, although that helped, as automatic stabilizers: the U.S. budget deficit widened much more in 2007-2010 than it did in 1930-33, even though the slump was much milder, simply because taxing and spending were much bigger as a share of GDP. And that budget deficit was a good thing, supporting demand at a crucial time.

Again, Bernanke and company were right to step in forcefully. But I’d argue that the fiscal environment was probably more important than monetary actions in limiting the damage.

Oh, and since 2010 officials everywhere, but especially in Europe, have been doing all they can to undo the favorable effects of automatic stabilizers. And the result is that in Europe economic performance is at this point considerably worse than it was at this point in the 1930s.

Krugman’s blog, 10/6/15

October 7, 2015

There were three posts yesterday.  The first was “Influenza Means Influence:”

So is this why I’ve just had such an awful week? I finally saw a specialist, and said yes to drugs; my ears are still partially clogged, but I can hear again, sort of.

Anyway, like all such lists, it’s kind of curious. I’m one rung above the pope, and several rungs above Christine Lagarde. And where’s Larry Summers? But I’ll take it.

Yesterday’s second post was “Learning Nothing in Europe:”

But not in Germany.
But not in Germany

If you want to feel despair about Europe’s prospects, first look at this recent presentation from Peter Praet, the chief economist of the ECB, then read this op-ed from the chief economist of the German finance ministry. Praet offers a portrait of a continent crippled by inadequate demand, with a strong deflationary downdraft; Ludger Schuknecht declares that we need to stop stimulus and reduce debt. In effect, he says that everyone should be like Germany, and run a huge trade surplus.

If there’s one thing we surely should have learned from the experience of the past seven years, it’s that adding up really matters. My spending is your income, your spending is my income, so if everyone slashes spending and tries to pay down debt at the same time, incomes fall and debt problems probably get worse. Europe’s debt to GDP ratio isn’t rising at this point because it’s spending more than it did during the good years; the overall structural deficit of the euro area is now very small, much lower than it was in 2005-2007, but low growth and inflation mean that GDP is going nowhere.

But German officials see this all as a tale of their virtue versus everyone else’s lack thereof. This means that nobody will change course aside from the ECB, which is in the process of finding out just how limited monetary policy really is when interest rates are already very low and fiscal policy is pulling in the wrong direction.

The last post yesterday was “TPP Take Two:”

I’ve described myself as a lukewarm opponent of the Trans-Pacific Partnership; although I don’t share the intense dislike of many progressives, I’ve seen it as an agreement not really so much about trade as about strengthening intellectual property monopolies and corporate clout in dispute settlement — both arguably bad things, not good, even from an efficiency standpoint. But the WH is telling me that the agreement just reached is significantly different from what we were hearing before, and the angry reaction of industry and Republicans seems to confirm that.

What I know so far: pharma is mad because the extension of property rights in biologics is much shorter than it wanted, tobacco is mad because it has been carved out of the dispute settlement deal, and Rs in general are mad because the labor protection stuff is stronger than expected. All of these are good things from my point of view. I’ll need to do much more homework once the details are clearer.

But it’s interesting that what we’re seeing so far is a harsh backlash from the right against these improvements. I find myself thinking of Grossman and Helpman’s work on the political economy of free trade agreements, in which they conclude, based on a highly stylized but nonetheless interesting model of special interest politics, that

An FTA is most likely to politically viable exactly when it would be socially harmful.

The TPP looks better than it did, which infuriates much of Congress.

Krugman’s blog, 10/3/15

October 4, 2015

There were three posts yesterday.  The first was “

Janet Gornick, Branko Milanovic, and yours truly will be talking about LIS and what it does Tuesday, October 6th, 2015, 11:30 a.m. to 12:30 p.m. It will be in the Skylight Room at the Graduate Center, 34th and 5th Avenue. More information here.

I’ll bet that’s what happened to the late and much lamented B. Altman & Co.  Yesterday’s second post was “The Blanchard Touch:”

Steven Pearlstein has a very nice profile of Olivier Blanchard, a world-class macroeconomist who went on to become an even more towering figure as chief economist at the IMF. (Full disclosure: Olivier and I were in grad school together — we worked out the analytics of anticipated shocks on the lunchroom table together — then were colleagues at MIT for many years.) Under Olivier’s leadership the IMF research department became a huge source of important work that was both intellectually bracing and extremely relevant to policy. And I thought I might add a bit to the profile by talking briefly about one line of that work, the IMF’s ground-breaking empirical analysis of fiscal policy.

Back in early 2010 policymakers in Europe, and some politicians in the United States, went all in for the notion of “expansionary austerity”, the belief that slashing spending in a depressed economy would actually increase demand by inspiring confidence. This view was allegedly supported by statistical evidence, although it was fairly obvious that this evidence was weak, that the statistical procedures being used to identify episodes of austerity and stimulusdidn’t actually work. But the world badly needed a careful examination of the facts.

The IMF delivered, showing that the measures of austerity used in expansionary austerity papers were indeed badly flawed; the Fund used actual changes in policy, and found that austerity has indeed been contractionary.

How contractionary? Initial estimates suggested a multiplier of around 0.5, and that’s what the Fund went with in much of its policy analysis, even though many of us warned from the beginning that the multiplier was probably much larger with interest rates at the zero lower bound. When the slumps in debtor countries proved much deeper than forecast, Blanchard and colleagues, enormously to their credit, revisited the issue and concluded that they hadunderstated the adverse effects of fiscal contraction. This was a wonderful thing to see, especially in a world where almost nobody ever admits having been wrong about anything. And it came in time to have a useful effect on policy, if policymakers had listened, which they didn’t.

But doesn’t government spending crowd out investment, so that austerity may be bad in the short run but good in the long run? No, said the IMF in yet another crucial analysis, which said that fiscal policy appears to produce crowding in, not crowding out — an economy weakened by austerity will invest less, not more.

And there’s more, like the IMF’s use of interwar data to assess the chances for successful debt reduction via austerity. (Not good.)

I’m sure I’m missing stuff. But the point should be clear: the Blanchard era at the IMF was one of unprecedented data-driven analysis of policy problems, done with consummate skill.

The last post yesterday was “Puzzled by Peter Gourevitch:”

Peter Gourevitch has a followup on politics and economics that leaves me, if anything, more puzzled about what’s going on.

He notes that

The fundamental point is that the Federal Reserve is not a seminar. It is not only about being “serious” or “smart” or “finding the right theory” or getting the data right. It is about a political game of balancing between multiple forces of pressure: the people inside the Fed Committee; Congress and the president, who make appointments and set budget and powers; political parties aggregating various ideas and interests to capture political office; interest groups who lobby hard one way or another; the media which helps or hurts one side or another, markets which respond with their various forms of power, foreign governments and countries.

But how does that differ from what I’ve been saying? If you read the column that I think motivated his original piece, it was all about trying to understand the political economy of a debate in which the straight economics seems to give a clear answer, but the Fed doesn’t want to accept that answer. I asked who has an interest in tighter money, and has ways to influence monetary policy; my answer is that bankers have the motive and the means.

And when he says that “his ideas about this broader context enter his columns perhaps once every six months,” I guess I have to conclude that he isn’t reading the columns very carefully. I talk all the time about interests and political pressures; the “device of the Very Serious People” isn’t about stupidity, it’s about how political and social pressures induce conformity within the elite on certain economic views, even in the face of contrary evidence.

Am I facing another version of the caricature of the dumb economist who knows nothing beyond his models? Or is all this basically a complaint that I haven’t cited enough political science literature?

I remain quite puzzled.

Krugman’s blog, 10/2/15

October 3, 2015

There were two posts yesterday.  The first was “Why Bankers Want Rate Hikes:”

I’ve been arguing that a major source of the urge to hike interest rates despite low inflation is the self-interest of bankers, whose profits suffer in a low-rate environment. Right on cue, the BIS has a new paper documenting that relationship. The key argument:

The “retail deposits endowment effect” derives from the fact that bank deposits are typically priced as a markdown on market rates, typically reflecting some form of oligopolistic power and transaction services. If the markdown becomes smaller as interest rates decline, then monetary policy tightening will increase net interest income. The endowment effect was a big source of profits at high inflation rates and when competition within the banking sector and between banks and non-banks was very limited, such as in many countries in the late 1970s. It has again become quite prominent, but operating in reverse, post-crisis, as interest rates have become extraordinarily low: as the deposit rate cannot fall below zero, at least to any significant extent, the markdown is compressed when the policy rate is reduced to very low levels.

This is pretty much what I said in the linked piece. The chart shows the paper’s estimate of the effect of higher short-term rates on bank profits (the partial derivative); it’s strongly positive at low rates.

So it really is in bankers’ interest to demand monetary tightening, even when it’s inappropriate given the state of the economy.

The second post yesterday was “The Investment Accelerator and the Woes of the World:”

Jason Furman of the Council of Economic Advisers gave anilluminating talk on the sources of weak business investment, largely aimed at refuting the “Ma! He’s looking at me funny!” school, which attributes US economic weakness to the way the Obama administration has created uncertainty, or hurt businessmen’s feelings, or something. As Furman shows, it’s a global slowdown, very much consistent with the “accelerator” model in which the level of investment demand depends on the rate of growth of overall demand.

It seems worth pointing out, or actually reiterating, several implications of this analysis that go beyond Obama-bashing and its discontents.

First, if weak demand leads to lower investment, which it does, and if fiscal austerity is contractionary, which it is, then in a depressed economy deficit spending doesn’t crowd investment out — it crowds investment in. Or to be more explicit, austerity policies don’t release resources for private investment — they lead to lower private investment, and reduce future capacity in addition to causing present pain. Conversely, stimulus in times of depression supports, not hinders, long-run growth.

Second, secular stagnation — persistent difficulties in achieving full employment — is a real concern if potential growth is slowing due to a combination of demography and weak technological progress, which seems to be happening. Lower growth means lower investment demand, so getting the private sector to spend enough gets harder.

Finally, an extreme case of this arises in China, where the exhaustion of the reserve of underemployed peasants plus, perhaps, a slowdown in the rate of technological catchup means that the very high investment rates of the past can’t be sustained. Look out below.

Krugman’s blog, 10/1/15

October 2, 2015

There was one post yesterday, “Prisoners of Derp:”

Matt O’Brien recalls Michael Kinsley’s pronouncement, five years ago, that inflation was coming, and his doubling down two years later. Kinsley, it turns out, remains unrepentant and very annoyed at the people who said that he didn’t know what he was talking about.

It’s really quite sad. Kinsley is a very smart guy, who also happens to have given me my big break into journalism by hiring me to write for Slate. But now he’s a prisoner of derp.

I’ve seen this a number of times, mainly in economics, although it happens in other fields (especially climate science) too. Somebody with a reputation for cleverness looks at, say, macroeconomics, and imagines himself smart enough to weigh in — not realizing that there is a technical discipline here, and that he, well, has no idea what he’s talking about.

And he chooses the wrong side, for whatever reason. I think Kinsley was, more than anything else, motivated by that TNR/Slate “counterintuitive” thing — hey, Bernanke and Krugman act like experts, but I’ll show my cleverness by taking the opposite position. For someone like Cliff Asness, it was more likely affinity fraud: the inflationistas sounded like his sort of people, and he didn’t realize that they were peddling derp.

So what do you do when it becomes clear that you did, indeed, pick the wrong side? You could pull a Kocherlakota — admit that you were wrong, and revise your world view. But that’s very rare. The great majority of people who find themselves having made an indefensible argument respond as Kinsley has, by doubling down trying to defend the indefensible — and by getting angrier and angrier at the people who warned them that they were getting it wrong.


Krugman’s blog, 9/30/15

October 1, 2015

There were four posts yesterday.  The first was “Tontines Explained:”

Trying to drag myself back to the real world — although my head still feels stuffed full of cotton. But I did want to weigh in on a Wonkblog piece from a couple of days ago about the possible virtues of tontines — retirement schemes in which the payouts go only to surviving members of a group. The article does reference a Simpsons episode; but surely we can’t tackle this subject without mentioning the movie The Wrong Box, with a plot that hinges on two brothers who are the sole survivors of a tontine. Here’s how the rest of the group went:

That’s one of the funniest movies ever made.  If you haven’t seen it, hie thee to Netflix…  Yesterday’s second post was “Commodities and Cranks:”

Does anyone remember the heyday of the inflationistas, when they were berating Ben Bernanke for debasing the dollar? One of their key arguments was that commodity prices were rising, and that this was a harbinger of soaring overall inflation.

So now, the same people are worried about deflation, and urging Janet Yellen to keep her pedal to the metal. Right? Right?

Funny how that doesn’t happen.

The third post yesterday was “Jeb Goes Galt:”

This is amazing:

“I think the left wants slow growth because that means people are more dependent upon government,” Bush told Fox Business’ Maria Bartiromo.

Remember, this is the establishment candidate for the GOP nomination — and he thinks he’s living in Atlas Shrugged.

They all do.  They’re the mole people.  And pray God they ALL “go Galt” so we don’t have to deal with them any more.  Yesterday’s last post was “The Fed Puzzle:”

OK, maybe it’s the ear infection, but I’m having a very hard time understanding what Peter Gourevitch is saying in this article name-checking me. Stuff is complicated? What?

In any case, however, Gourevitch seems to have missed a crucial point about my puzzlement over the Fed’s eagerness to raise rates. I’m not saying “I’m smart, so why aren’t they listening to me?” Yes, people can have different views about how the world works.

But the strange thing here is that as far as anyone can tell, the people inside the Fed who are eager to hike and the people outside the Fed who think it’s premature have more or less the same economic models in their heads. It’s not just me; Larry Summers, the IMF (presumably reflecting Olivier Blanchard), the World Bank, and more are aghast at the urge to hike; and the thing is, all of the outsiders come from the same Cambridge 1970s updated Keynesian school of macro as the key insiders. Most of us were Stan Fischer’s students!

So we’re trying to understand why the insiders have such a different view of appropriate policy from the outsiders when their intellectual apparatus is the same. If you don’t get that, you’re missing the point.

Krugman’s blog, 9/29/15

September 30, 2015

There was one post yesterday, “And Then There Were None:”

Well, predictions of full recovery were premature — that is, of my recovery from the nasty cold of the past few days. Hence no posting: microbe economics overwhelmed macroeconomics.

But I do want to weigh in for a minute on Donald Trump’s tax plan — which would, surprise, lavish huge cuts on the wealthy while blowing up the deficit. That’s in contrast to Jeb Bush’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit, and Marco Rubio’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit.

At this point there are no Republican candidates deviating at all from the usual pattern. Why, it’s almost as if nobody in the party ever cared about deficits except as an excuse to slash social spending, and is totally committed to redistributing income upward.

And there is, of course, no evidence — zero, nada, zilch — that cutting taxes on the rich will yield large economic benefits.

What we’re seeing here is a party completely incapable of reforming …

Krugman’s blog, 9/26/15

September 28, 2015

There was one post on Saturday, “Economics: What Went Right:”

Sorry about lack of music. I was traveling while suffering from a cold, and the combination of congestion and pressure changes was really, really unpleasant. OK now, I think.

I’m at EconEd; here are my slides for later today. The theme of my talk is something I’ve emphasized a lot over the past few years: basic macroeconomics has actually worked remarkably well in the post-crisis world, with those of us who took our Hicks seriously calling the big stuff — the effects of monetary and fiscal policy — right, and those who went with their gut getting it all wrong. (Matt O’Brien has been reminding us of Michael Kinsley’s insistence that inflation was coming — and his refusal to conclude from the experience that people like me might, you know, actually know something.)

One thing I do try is to concede that one piece of the conventional story hasn’t worked that well, namely the Phillips curve, where the “clockwise spirals” of previous protracted large output gaps haven’t materialized. Maybe it’s about what happens at very low inflation rates.

What’s notable about the Fed’s urge to raise rates, however, is that Fed officials, including Janet Yellen, are acting as if they have high confidence in their models of inflation dynamics –which is the one thing we really haven’t done well at recently. I really fear that we’re looking at incestuous amplification here.


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