Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 4/24/15

April 25, 2015

There were two posts yesterday.  The first was “Clinton Rules:”

So there’s a lot of buzz about alleged scandals involving the Clinton Foundation. Maybe there’s something to it. But you have to wonder: is this just the return of “Clinton rules”?

If you are old enough to remember the 1990s, you remember the endless parade of alleged scandals, Whitewater above all — all of them fomented by right-wing operatives, all eagerly hyped by mainstream news outlets, none of which actually turned out to involve wrongdoing. The usual rules didn’t seem to apply; instead it was Clinton rules, under which innuendo and guilt by association were considered perfectly OK, in which the initial suggestion of lawbreaking received front-page headlines and the subsequent discovery that there was nothing there was buried in the back pages if it was reported at all.

Some of the same phenomenon resurfaced during the 2008 primary.

So, is this time different? First indications are not encouraging; it’s already apparent that the author of the anti-Clinton book that’s driving the latest stuff is a real piece of work.

Again, maybe there’s something there. But given the history here, we’d all be well advised to follow our own Clinton rules, and be highly suspicious of any reports of supposed scandals unless there’s hard proof rather than mere innuendo.

Oh, and the news media should probably be aware that this isn’t 1994: there’s a much more effective progressive infrastructure now, much more scrutiny of reporting, and the kinds of malpractice that went unsanctioned 20 years ago can land you in big trouble now.

Yesterday’s second post was “Blurry Fiscal Hindsight:”

Simon Wren-Lewis continues his voice in the wilderness campaign against British economic myths, focusing on claims that Labour was fiscally profligate. Needless to say, I agree, and would like to enlarge on his points.

The simple fact is that Britain was not running big deficits on the eve of the financial crisis, and that public debt wasn’t high by historical standards. So how does that record get turned into a claim of wildly irresponsible budgeting? As Wren-Lewis says, there are really two levels to this diversion. First, there’s the highly questionable reinterpretation of past GDP data; second, there’s the implicit proposition that governments in the past should have based fiscal policy on information (or actually “information”) that didn’t exist at the time.

On the first point: these days official estimates say that Britain, although it had a modest actual deficit in 2006-2007, had a large “structural” deficit. How so? Well, these estimates are now based on estimates of potential output, which purport to show that the British economy in 2006-7 was hugely overheated and operating far above sustainable levels.

But nothing one saw at the time was consistent with this view. In particular, there was no sign of inflationary overheating. So why do the usual suspects claim that Britain had a large positive output gap?

The answer is that the statistical techniques used by most of the players here automatically reinterpret any prolonged slump as a slowdown in the growth of potential output — and because they also smooth out potential output, the supposed fall in current potential propagates back into the past, making it seem as if the pre-crisis economy was wildly overheated.

As an extreme example, consider Greece. Here’s the IMF estimate of Greece’s output gap before the storm:

Does anyone really believe that Greece was operating 10 percent — 10 percent! — above capacity in 2007-8? This is just a smoothing algorithm producing nonsense results in the face of economic catastrophe.

And this backward propagation of economic disaster also leads, automatically, to the appearance of past fiscal profligacy. Consider the case of Ireland. Back in 2006 George Osborne praised the country as a “shining example” of “wise economic policy-making”, and especially praised the country’s fiscal prudence. Today, backward-looking estimates say that Ireland was fiscally irresponsible all along:

Even if you believe these estimates (which you shouldn’t), it’s unfair to criticize the Irish government of the time for fiscal profligacy. They believed that they were acting responsibly, and all the best people were praising them for it.

So were Blair and Brown irresponsible? No, not at all. True, if they had known the crisis was coming they would probably have tried to pay down debt during the good years. But they didn’t know that, and in any case it’s hard to imagine that it would have made any significant difference. Claiming that there was a major failure of fiscal prudence isn’t even 20-20 hindsight, it’s hindsight with a severe case of astigmatism.

Krugman’s blog, 4/23/15

April 24, 2015

There were two posts yesterday.  The first was “ACA Airbrushing:”

Yesterday I mentioned the phenomenon of austerity airbrushing — the way people who made pro-austerity arguments that have been refuted by events now claim that they said something quite different from what they did, in fact, say. There’s a comparable development when it comes to health reform — except that this is even more amazing, because it depends on observers forgetting what the debate looked like in the very recent past.

Thus, Jonathan Chait has some fun with the very thin-skinned Cliff Asness, who claims that it was “never in dispute” that Obamacare would increase the number of Americans with health insurance. Hmmm:

As Brad DeLong likes to say, I’ll stop calling these people Orwellian when they stop using 1984 as an operations manual. Although in these cases I suspect that we’re really talking about a pathetic level of self-delusion.

Yesterday’s second post was “Friday Night Music, Early Edition: San Fermin:”

Yes, I know it’s Thursday — but they have a new record just out, and two concerts in Williamsburg tonight and tomorrow. (Alas, I can’t make it — my various day jobs sometimes get in the way of my indie obsession.) And this is the first video I’ve seen that really conveys how great they are in live performance.

At the risk of burbling too much: the band really has five leads, with Allen and Charlene on lead vocals, but with John and Stephen (trumpet and sax) often moving to the front and carrying the energy, and Rebekah (violin and backup vocals) also up front and just as much part of the visual show. The effect is a level of energy and excitement above and beyond anything the record (fine as it is) can convey.


Krugman’s blog, 4/22/15

April 23, 2015

There was one post yesterday, “Airbrushing Austerity:”

Ken Rogoff weighs in on the secular stagnation debate, arguing basically that it’s Minsky, not Hansen — that we’re suffering from a painful but temporary era of deleveraging, and that normal policy will resume in a few years.

As far as I can tell, however, Rogoff doesn’t address the key point that Larry Summers and others, myself included, have made — that even during the era of rapid credit expansion, the economy wasn’t in an inflationary boom and real interest rates were low and trending downward — suggesting that we’re turning into an economy that “needs” bubbles to achieve anything like full employment.

But what I really want to do right now is note something else, which is visible in the Rogoff piece and in many other things one reads lately — a backward-looking view of the austerity fever that swept policymaking circles in 2010 and airbrushes out the reality of intellectual folly. You see this sort of thing when people who predicted soaring interest rates from crowding out right away now claim that they were only talking about long-term solvency; when people who issued dire warnings about runaway inflation say that they were only suggesting a risk, or maybe talking about financial stability; and so on down the line.

So, in Rogoff’s version of austerity fever all that was really going on was that policymakers were excessively optimistic, counting on a V-shaped recovery; all would have been well if they had read their Reinhart-Rogoff on slow recoveries following financial crises.

Sorry, but no — that’s not how it happened. When I wrote about fear of invisible bond vigilantes and belief in the confidence fairy, I wasn’t inventing stuff out of thin air.

David Cameron didn’t say “Hey, we think recovery is well in hand, so it’s time to start a modest program of fiscal consolidation.” He said “Greece stands as a warning of what happens to countries that lose their credibility.” Jean-Claude Trichet didn’t say “Yes, we understand that fiscal consolidation is negative, but we believe that by the time it bites economies will be nearing full employment”. He said

As regards the economy, the idea that austerity measures could trigger stagnation is incorrect … confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.

I can understand why a lot of people would like to pretend, perhaps even to themselves, that they didn’t think and say the things they thought and said. But they did.

Krugman’s blog, 4/21/15, 5:53 AM

April 22, 2015

There was one post yesterday, “The Stability Two-Step:”

Yes, I’m wide awake at a ridiculous hour thanks to jet lag. Why do you ask?

A couple of weeks ago Ben Bernanke wrote a detailed takedown of … somebody, who has been arguing that money should be tighter even in a depressed economy, so as to safeguard financial stability. It was actually about John Taylor and maybe the BIS. Now Tony Yatesgoes after Taylor much more directly. This is all good stuff — but I wonder whether it’s making the issue more complex than it needs to be.

The thing that strikes me about the financial stability group is that they are all permahawks. Taylor and the BIS have often argued that money is too loose; have they ever, at least in the past two decades, argued that it is too tight? Not that anyone has noticed.

But if monetary policy is too expansionary on a sustained basis, surely we expect to see accelerating inflation. And there have in fact been repeated warnings from this group that inflation is about to take off. But what we see instead is this:

You might expect some rethinking, given this absence of inflationary trouble to materialize. But the only rethinking that seems to happen is a search for new reasons to make the same complaints about loose money. Inflation is still perpetually looming — no argument is ever abandoned — but now loose money is also a danger to financial stability.

As Yates suggests, this is especially strange when it takes the form of attributing the financial crisis to deviations from the Taylor rule. That rule was devised to produce stable inflation; it would be a miracle, a benefaction from the gods, if that rule just happened to also be exactly what we need to avoid bubbles. But even aside from Taylor’s insistence that he, and only he, can offer the One True Rule, the two-step — the ever-changing rationale for never-changing policy — is reason in itself to discount the whole thing.

Let me also add that if it’s really that easy for monetary errors to endanger financial stability — if a deviation from perfection so small that it leaves no mark on the inflation rate is nonetheless enough to produce the second-worst financial crisis in history — this is an overwhelming argument for draconian bank regulation. Modest monetary mistakes will happen, so if you believe that these mistakes caused the global financial crisis you must surely believe that we need to do whatever it takes to make the system less fragile. Strange to say, however, I don’t seem to be hearing that from Taylor or anyone else in that camp.

It’s all very odd stuff. And you should worry a lot about the possibility that one of these days the Fed may be run by people who think this way.

Krugman’s blog, 4/19/15

April 20, 2015

There were two posts on 4/19.  The first was “Notes on Greece:”

OK, that was intense. I’ll write more about my visit, but right now (from Frankfurt, where I’m laying over for a couple of hours) I want to make a data point. about just how much adjustment Greece has done.

First, on the fiscal side, Greece has made an incredible adjustment — close to 20 percent of potential GDP, or the U.S. equivalent of about $3 trillion per year (not our usual 10-year calculation) in spending cuts and tax hikes:


Second, Greece has accepted roughly a 25 percent cut in nominal private-sector labor costs, or more than 30 percent relative to the euro average, far more than anyone else:


You can make a pretty good case that the costs of this adjustment were so large that Greece would have been better off exiting the euro in 2010. You can make an even better case that Greece would have been much better off if it had never joined in the first place. But at this point these are sunk costs. If Greece can negotiate a halfway reasonable compromise, one that more or less pauses further austerity, it’s hard to see that the risks of exit would be worth it.

And the creditors would be equally well served by such a compromise.

So is it going to happen? Well, it’s the right thing to do — which tells you nothing.

The second post on 4/19 was “Crowding In and the Paradox of Thrift:”

As Francesco Saraceno notes, the IMF’s research department, which was always excellent, has become an extraordinary source of information and ideas in this Age of Blanchard. In particular, these days you can pretty much count on the semiannual World Economic Outlook to offer some dramatic new insight into how the world works. And the latest edition is no exception.

The big intellectual news here is Chapter 4, on business investment. As the report notes, weak business investment has been a major reason for global economic weakness. But why is business investment weak?

Broadly speaking, there are two views out there. One is that we have a special problem of lack of business confidence, driven by fiscal worries, failure to make needed structural reforms, and maybe even careless rhetoric. The U.S. right, in particular, is fond of the “Ma! He’s looking at me funny!” hypothesis – the claim that President Obama, by occasionally suggesting that some businessmen have behaved badly, has hurt their feelings and perpetuated the slump.

The other view is that business investment is weak because the economy is weak. Specifically, it is that the effects of household deleveraging and fiscal consolidation have produced slow growth, which has reduced the incentive to add capacity – the “accelerator” effect – leading to low investment that further reduces growth.

The IMF comes down strongly for the second view. In fact, if anything it finds that business investment has held up a bit better than one might have expected in the face of economic weakness:

This is, interestingly, something I concluded a while back looking at U.S. data, during the height of the he’s-looking-at-me-funny era.

But wait, there’s more.

In order to deal with the problem of reverse causation – weak investment can cause weak growth as well as vice versa – the IMF adopts an “instrumental variables” approach. Loosely speaking, it looks for episodes of weak growth that are clearly caused by other factors, so that it can be sure that falling investment is an effect rather than a cause. And the instrument it uses is fiscal consolidation. That is, it finds cases where spending cuts and/or tax hikes depress demand and hence investment.

What it doesn’t say explicitly is that in using this procedure, it manages in passing both to refute a very widely held but false belief about deficits and to confirm a highly controversial Keynesian proposition.

The false belief is that government deficits necessarily “crowd out” investment, so that reducing deficits should free up funds that lead to higher investment. Not so, says the IMF: when governments introduce deficit-reduction measures, investment falls instead of rising. This says that the deficits were crowding investment in, not out.

And there’s another way to look at it: when governments introduce austerity measures, they are trying to reduce their net borrowing – in effect, they are raising their savings rate. What the IMF tells us is that such attempts to increase saving actually lead to lower, not higher, investment – and since saving equals investment, actual savings fall. So what we have here is an empirical confirmation of the existence of the paradox of thrift!

Remarkable stuff. Someone tell Wolfgang Schäuble.

Krugman’s blog, 4/15/15

April 16, 2015

There was one post yesterday, “Nonlinearity, Multiple Equilibria, and the Problem of Too Much Fun (Wonkish):”

There’s been another blogospheric debate on methodology, this time involving a currently fashionable critique of mainstream macroeconomics — namely, that it’s too reliant on linear models and fails to make allowance for multiple equilibria. Frances Coppola and Wolfgang Munchau are leading the charge, with Roger Farmer (I think) in support; Brad DeLong and Tony Yates beg to differ. So do I.

There’s plenty wrong with macroeconomics as practiced, and plenty more wrong with macroeconomists as practitioners — and I haven’t been shy about pointing these failings out. But this is the wrong line of attack, for two reasons.

First, claims that mainstream economists never think about, and/or lack the tools to consider, nonlinear stuff and multiple equilibria and all that are just wrong. Tony Yates notes Munchau declaring that the zero lower bound is a minefield that economists have avoided; what? As Yates says,

The implication is ‘ooh, look at this really obvious real world thingy that economists just can’t deal with’. But actually, they can and do, and it’s embraced by 100s of papers now, since Krugman wrote the first modern one in 1998.

What about multiple equilibria? Well, most of my academic macroeconomic work is in international macro, especially on currency crises, and in that sub-field multiple equilibria — oh, and the effects of leverage and balance sheet effects — is a long-standing part of the approach. Here’s my 1999 paper on a multiple-equilibrium approach to the Asian financial crisis. For that matter, Diamond-Dybvig — the standard model for thinking about bank runs — is all about multiple equilibria and self-fulfilling prophecies.

So if your assertion is that economists don’t have the tools to think about such things, and/or are too boring and conventional to go there, well, that’s just uninformed. Been there, done that.

But maybe the complaint is simply that economists don’t do enough nonlinear analysis. And I can say personally that while I am, I think, pretty well aware of the possibilities of multiple equilibria and all that, they aren’t the staple of my analysis. There is, however, a reason for that: that kind of stuff is too easy and too much fun.

When you first start playing around with multiple-equilibrium models — in my generation that generally happened in grad school — there’s a period of enthusiasm. Crazy things can happen! Anything can happen! I can write down a model in which X leads to Z instead of Y!

Also, you can call spirits from the vasty deep. But will they come when you do call?

The point is that it’s quite easy, if you’re moderately good at pushing symbols around, to write down models where nonlinearity leads to funny stuff. But showing that this bears any relationship to things that happen in the real world is a lot harder, so nonlinear modeling all too easily turns into a game with no rules — tennis without a net. And in my case, at least, I ended up with the guiding principle that models with funny stuff should be invoked only when clearly necessary; you should always try for a more humdrum explanation.

So, was the crisis something that requires novel multiple-equilibrium models to understand? That’s far from obvious. The run-up to crisis looks to me more like Shiller-type irrational exuberance. The events of 2008 do have a multiple-equilibrium feel to them, but not in a novel way: once you realized that shadow banking had recreated the hazards of unregulated traditional banking, all you had to do was pull Diamond-Dybvig off the shelf.

And since the crisis struck, as I’ve argued many times, simple Hicksian macro — little equilibrium models with some real-world adjustments — has been stunningly successful. Notice, by the way, that in the linked post I do include the zero lower bound — no minefield here — which in turn makes the model nonlinear, with a qualitative change in behavior when the economy is sufficiently depressed that the zero bound is binding. But all that comes straight out of a quite simple framework, with no huffing and puffing and diatribes against conventional economics.

As I said, there are plenty of problems with economics. But I’d argue that ranting about the need for new models is not helpful; in policy terms, our problem has been refusal to use the pretty successful models we already have.

Krugman’s blog, 4/14/15

April 15, 2015

There was one post yesterday, “I Am Not A Generic Economist:”

Sorry about the radio silence — I’m scrambling to (a) meet a deadline on a longish piece I foolishly agreed to write and (b) trying to get ready for a quick trip to Brussels and Athens. (No, don’t mail or call me about arranging a meeting or interview — that’s up to my hosts, and I already have negative free time.)

But I think I need to respond to something really annoying. The Atlantic has an article bashing economists, based on a paper by Fourcade et al — and the article is illustrated with a picture of yours truly.

So, what does the article say about me that justifies my position as the face of what’s wrong with economists? Well, actually it never so much as mentions me.

And as it happens I have written about the Fourcade paper — approvingly:

I guess I hope that these things are outliers. But if you feel cynical about economics after reading Fourcade, you may be right.

So how, exactly, do I become the face of bad economics here? This is just lazy and sloppy, and whoever stuck my picture there should be ashamed.

 I used to subscribe to The Atlantic, back when it was worth reading.  But then they hired The Pasty Little Putz and Megan McCurdle…

Krugman’s blog, 4/11/15

April 13, 2015

There were two posts on Saturday (none on Sunday).  The first was “Matter Over Mind:”

Way back in 1996, on the 100th anniversary of the New York Times magazine, the Times had a clever idea: they asked a number of people to write essays pretending to look backward a century from the perspective of 2096. Sadly, most of the writers were too uptight and dignified to comply; they wrote blah-blah-the-decades-to-come stuff. But I threw myself in with a little piece titled White Collars Turn Blue. As the title suggested, one theme of the essay was a pushback against the notion that advancing technology would mean ever-growing demand for highly educated workers; I argued that computers would take over many of the cognitive tasks we find difficult, but that human beings would continue to be wanted for jobs that require common sense, including many forms of manual labor.

Or as one friend described it at the time, my thesis was that we’ll always need maids and gardeners.

And it’s happening. I missed this paper by Beaudry, Green, and Sand when it was first circulated, but it’s right on that issue:

[W]e argue that in about the year 2000, the demand for skill (or, more specifically, for cognitive tasks often associated with high educational skill) underwent a reversal. Many researchers have documented a strong, ongoing increase in the demand for skills in the decades leading up to 2000. In this paper, we document a decline in that demand in the years since 2000, even as the supply of high education workers continues to grow. We go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers.

An obvious implication is that belief that income inequality is all about, and can be fixed by, education is even more wrong than you thought.

Saturday’s second post was “A Victory Against the Shadows:”

There are two big lessons from GE’s announcement that it is planning to get out of the finance business. First, the much maligned Dodd-Frank financial reform is doing some real good. Second, Republicans have been talking nonsense on the subject. OK, maybe point #2 isn’t really news, but it’s important to understand just what kind of nonsense they’ve been talking.

GE Capital was a quintessential example of the rise of shadow banking. In most important respects it acted like a bank; it created systemic risks very much like a bank; but it was effectively unregulated, and had to be bailed out through ad hoc arrangements that understandably had many people furious about putting taxpayers on the hook for private irresponsibility.

Most economists, I think, believe that the rise of shadow banking had less to do with real advantages of such nonbank banks than it did with regulatory arbitrage — that is, institutions like GE Capital were all about exploiting the lack of adequate oversight. And the general view is that the 2008 crisis came about largely because regulatory evasion had reached the point where an old-fashioned wave of bank runs, albeit wearing somewhat different clothes, was once again possible.

So Dodd-Frank tries to fix the bad incentives by subjecting systemically important financial institutions — SIFIs — to greater oversight, higher capital and liquidity requirements, etc.. And sure enough, what GE is in effect saying is that if we have to compete on a level playing field, if we can’t play the moral hazard game, it’s not worth being in this business. That’s a clear demonstration that reform is having a real effect.

Now, the more or less official GOP line is that the crisis had nothing to do with runaway banks — it was all about Barney Frank somehow forcing poor innocent bankers to make loans to Those People. And the line on the right also asserts that the SIFI designation is actually an invitation to behave badly, that institutions so designated know that they are too big to fail and can start living high on the moral hazard hog.

But as Mike Konczal notes, GE — following in the footsteps of others, notably MetLife — is clearly desperate to get out from under the SIFI designation. It sure looks as if being named a SIFI is indeed what it’s supposed to be, a burden rather than a bonus.

A good day for the reformers.

Krugman’s blog, 4/8/15

April 9, 2015

There was one post yesterday, “BB and the Permahawks:”

Ben Bernanke comes down firmly against the idea that concerns about financial instability should lead central banks to raise interest rates even in a depressed economy. Good — and I was especially pleased to see him citing the Swedish example and the Ignoring of Lars Svensson as a case study.

One odd thing, however, is that I’m not at all sure that most people — even economists — would be able to figure out who, exactly, Bernanke is arguing with. And that is, I think, an important omission. We can and should have a pure economics debate about appropriate interest rate policy; but if we’re trying to understand the political economy — and we should, because this is about getting good decisions as well as good analysis — it is definitely relevant to note that the people making the financial stability argument for higher rates are permahawks, who keep coming up with new justifications for an unchanging policy demand.

Take, as possibly the most prominent advocate of the financials stability argument, the Bank for International Settlements. Originally (2011), the BIS demanded rate hikes to head off the alleged threat of inflation:

Central banks need to start raising interest rates to control inflation and may have to act faster than in the past, the Bank for International Settlements said.

“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published yesterday in Basel, Switzerland. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”

“The world economy is growing at a historically respectable rate of around 4 percent,” Caruana said. “The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded.”


Since the inflation warning proved wrong, and deflation risks turned out to be far from over, you might expect some reconsideration of the policy demand. Instead, however, you get new reasons for the same policy:

Note that suggestion that easy money reduces the incentive for “reform”, which in Europe as in America tends to take the form of cuts in social spending. This is quite close to the position of conservatives in the US, who seem annoyed that the Fed’s policies have prevented the crisis they were sure was imminent as a result of liberal big spending.

Anyway, I think Ben Bernanke did us a bit of a disservice by not linking to whoever it is he’s arguing with. It would help to know that John Taylor and the BIS are on the other side, because this would let readers place their position here in context with their other positions.

Krugman’s blog, 4/7/15

April 8, 2015

There were three posts yesterday.  The first was “The Fiscal Future II: Not Enough Debt?”:

Continuing my meditation on Brad DeLong’s meditation on the fiscal future. Brad doesn’t just argue that governments should be bigger in the future; he also argues that governments have historically not had enough debt, and should have more.

Why? Because, he says, r-g — the difference between the real rate of interest on government debt and the rate of economic growth — has been consistently negative. Why is this significant?

Well, we normally imagine that if a government engages in deficit spending now, it will have to engage in compensating austerity of some form later — even if it doesn’t plan to pay of the debt, it will still have to cut spending or raise taxes so as to run a primary, non-interest surplus if it wants to stabilize the ratio of debt to GDP.

But when r is less than g, a higher debt stabilizes itself: erosion of the debt ratio by growth means that no primary surplus is needed. So you can eat your cake and have it too. A bigger debt lets the government do useful things, like invest in infrastructure; it gives investors the safe assets they want; and it need not lead to any future pain as long as you don’t do foolish things like join a currency union with no well-defined lender of last resort.

But is r really less than g for all major players? Brad uses the average interest rate on debt, which I haven’t had time to compute. What I’ve done is use the 10-year bond rate — which is somewhat higher than the rate Brad uses, I believe — and examine the G7 over the period 1993-2007. And I think we get some interesting insights.

First, all of the G7 paid roughly the same real interest rate, using GDP deflators to measure inflation:

As I’ve noted before, this doesn’t mean that the Wicksellian natural rate was the same everywhere; in the case of Japan, at least, the actual rate was well above the rate consistent with full employment. In any case, however, arbitrage looks quite strong.

However, countries differed a lot in their growth rates, so that r-g varies considerably. And this raises the question, did the “right” countries have a lot of debt?

Compare debt ratios in 2007 with r-g estimated over the 1993-2007 period:

For English-speaking members of the G7, r-g is slightly positive, but would be negative if I used a broader interest definition. But it was much higher in Japan, Italy, and Germany, which all had slow growth over this period — and Japan and Italy also had high debt. (The causation almost surely ran from slow growth to high debt, not the other way around.)

This suggests, I think, that Brad’s case for higher debt, while powerful, doesn’t apply to everyone. It’s a good case for English speaking members of the G7 and also for Germany looking forward (the 10-year index yield is -1 percent). Unfortunately, the biggest debt accumulations have come in economies that have much lower growth — mainly demography in Japan, productivity collapse in Italy.

No strong moral here, but I do think we need to be careful not to assume that the US case generalizes to everyone. Hellenization — assuming that we’re all Greece — has been a big problem in recent years; but Americanization — assuming that the US is representative — could be a problem too.

Yesterday’s second post was “Economics of Love:”

Not love as in romance; love as in tennis, meaning zero. Cecchetti & Schoenholtz argue that “zero matters” in macroeconomics; specifically, both the zero almost-lower bound on interest rates and downward wage rigidity make the case that deflation or for that matter very low inflation is a bad thing.

Just to note: This is exactly the point I’ve made a number of times, talking about the two zeroes. Not complaining here — many people have made this point, and we need them to keep making it.

The message instead is for those people — you know who you are — who imagine that the macroeconomics in this blog and in my column is somehow way out there on the left. In reality, I’m almost depressingly mainstream. It’s the other side in these debates that is showing lots of creativity, coming up with novel and innovative arguments about why we should do stupid things.

The last post yesterday was “Rand Paul and the Empty Box:”

Nate Cohn tells us that Rand Paul can’t win as a libertarian, because there basically aren’t any libertarians. And that’s true. I wish I could say that Rand Paul can’t win because he believes in crank monetary economics, etc. But the truth is that these things matter much less than the fact that not many Americans consider themselves libertarian, and even those who do are deluding themselves.

But why? Think of a stylized representation of issue space:

You might be tempted to say that this is a vast oversimplification, that there’s much more to politics than just these two issues. But the reality is that even in this stripped-down representation, half the boxes are basically empty. There ought in principle, you might think, be people who are pro-gay-marriage and civil rights in general, but opposed to government retirement and health care programs — that is, libertarians — but there are actually very few.

There’s also a corresponding empty box on the other side, which is maybe even emptier; I don’t even know a good catchphrase for it. (Suggestions?) I’m putting in “hardhats” to show my age, because I remember the good old days when rampaging union workers — who presumably supported pro-labor policies, unemployment benefits, and Medicare — liked to beat up dirty hippies. But it’s hard to find anyone like that in today’s political scene.

So why are these boxes empty? Why is American politics essentially one-dimensional, so that supporters of gay marriage are also supporters of guaranteed health insurance and vice versa? (And positions on foreign affairs — bomb or talk? — are pretty much perfectly aligned too).

Well, the best story I have is Corey Robin’s: It’s fundamentally about challenging or sustaining traditional hierarchy. The actual lineup of positions on social and economic issues doesn’t make sense if you assume that conservatives are, as they claim, defenders of personal liberty on all fronts. But it makes perfect sense if you suppose that conservatism is instead about preserving traditional forms of authority: employers over workers, patriarchs over families. A strong social safety net undermines the first, because it empowers workers to demand more or quit; permissive social policy undermines the second in obvious ways.

And I suppose that you have to say that modern liberalism is in some sense the obverse — it is about creating a society that is more fluid as well as fairer. We all like to laugh at the war-on-Christmas types, right-wing blowhards who fulminate about the liberal plot to destroy family values. We like to point out that a country like France, with maternity leave, aid to new mothers, and more, is a lot more family-friendly than rat-race America. But if “family values” actually means traditional structures of authority, then there’s a grain of truth in the accusation. Both social insurance and civil rights are solvents that dissolve some of the restraints that hold people in place, be they unhappy workers or unhappy spouses. And that’s part of why people like me support them.

In any case, bear this in mind whenever you read some pontificating about a libertarian moment, or whatever. There are almost no genuine libertarians in America — and the people who like to use that name for themselves do not, in reality, love liberty.


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