Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 5/20 and 5/21/15

May 22, 2015

There were 2 posts on 5/20.  The first was “Conservatives and Keynes:”

Tony Yates asks, “Why can’t we all get along?” Lamenting another really bad, obviously political defense of austerity, he declares that

it’s disappointing that the debate has become a left-right thing. I don’t see why it should.

But the debate over business-cycle economics has always been a left-right thing. Specifically, the right has always been deeply hostile to the notion that expansionary fiscal policy can ever be helpful or austerity harmful; most of the time it has been hostile to expansionary monetary policy too (in the long view, Friedman-type monetarism was an aberration; Hayek-type liquidationism is much more the norm). So the politicization of the macro debate isn’t some happenstance, it evidently has deep roots.

Oh, and some of us have been discussing those roots in articles and blog posts for years now. We’ve noted that after World War II there was a concerted, disgraceful effort by conservatives and business interests to prevent the teaching of Keynesian economics in the universities, an effort that succeeded in killing the first real Keynesian textbook. Samuelson, luckily, managed to get past that barrier — and many were the complaints. William Buckley’s God and Man at Yale was a diatribe against atheism (or the failure to include religious indoctrination, which to him was the same thing) and collectivism — by which he mainly meant teaching Keynesian macroeconomics.

What’s it all about, then? The best stories seem to involve ulterior political motives. Keynesian economics, if true, would mean that governments don’t have to be deeply concerned about business confidence, and don’t have to respond to recessions by slashing social programs. Therefore it must not be true, and must be opposed. As I put it in the linked post,

So one way to see the drive for austerity is as an application of a sort of reverse Hippocratic oath: “First, do nothing to mitigate harm”. For the people must suffer if neoliberal reforms are to prosper.

If you think I’m being too flip, too conspiracy-minded, or both, OK — but what’s your explanation? For conservative hostility to Keynes is not an intellectual fad of the moment. It has absolutely consistent for generations, and is clearly very deep-seated.

The second post on 5/20 was “I’m With Stupid:”

Via FT Alphaville, James Montier has an interesting piece castigating economists for their “interest rate idolatry”, their belief that central bank-set interest rates matter a lot for the economy and that therefore it is useful, at least conceptually, to think about the “natural” rate of interest that would lead the economy to full employment. There is no evidence that interest rates matter in that way, he says, and economists who talk about natural rates are simply engaged in groupthink.

In particular, he identifies three blind and/or stupid economists leading everyone astray: Janet Yellen, Larry Summers, and yours truly.

Well, it could be true; there’s plenty of stupidity in the world, and much of it imagines itself wise. But in my experience people who declare confidently that “economists don’t understand X” usually turn out to be wrong both about X and about what economists understand. As I wrote in one context, often what they imagine to be a big conceptual or empirical failure is just a failure of their own reading comprehension.

Let me also say that if you were going to look for economists who blindly repeat doctrine, without the intelligence or courage to challenge conventional wisdom, neither Janet Yellen nor Larry Summers would be top picks.

So Montier offers a lot of evidence that interest rates move a lot, which isn’t news to anyone, and then one argument he apparently thinks is a big thing economists don’t know — that business investment is basically unaffected by interest rates. Who would have suspected such a thing? Well, everyone. Here’s what I wrotesome years ago:

Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we used to hear a lot about the monetary “transmission mechanism” — how the Fed actually got traction on the real economy. Both the phrase and the subject have gone out of fashion — but it’s still an important issue, and arguably now more than ever.

Now, what you learned back then was that the transmission mechanism worked largely through housing. Why? Because long-lived investments are very sensitive to interest rates, short-lived investments not so much. If a company is thinking about equipping its employees with smartphones that will be antiques in three years, the interest rate isn’t going to have much bearing on its decision; and a lot of business investment is like that, if not quite that extreme. But houses last a long time and don’t become obsolete (the same is true to some extent for business structures, but in a more limited form). So Fed policy, by moving interest rates, normally exerts its effect mainly through housing.

But Montier seems to have forgotten about housing, which is actually a fairly common problem among certain kinds of econocritics.

And do interest rates move housing? Here’s the inverse of the Fed funds rate versus housing starts during the period when major moves in monetary policy were mainly driven by concerns about inflation (as opposed to bursting bubbles):

Looks like a relationship to me. And I would say that for many economists of a certain age, the events of the early 1980s were especially important in convincing us that monetary policy can matter a lot. Paul Volcker decided to tighten; interest rates soared, housing collapsed, and the economy plunged into a deep recession. He decided that the economy had suffered enough, rates plunged, housing surged, and it was morning in America.

Beyond that, the general proposition that money matters also rests on a lot of careful empirical work — in fact, on two styles of careful work. There’s the Romer-Romer narrative approach, which examines Fed minutes to identify “episodes in which there were large monetary disturbances not caused by output fluctuations”, and the Sims approach, which uses time-series methods. Both find that monetary policy does indeed matter.

Are there times when monetary policy — or at least conventional monetary policy — can’t do the job? Of course. Summers and I have been talking about the zero lower bound since the 1990s — he introduced the argument that the ZLB justifies a positive inflation target, I brought liquidity-trap analysis out of the mists and back into modern economics.

The bottom line here is that there’s plenty of real stupidity in the world; we don’t need to add to the cloud of confusion with a critique of imaginary stupidity.

Yesterday there were three posts, the first of which was “Making Hay While the Sun Shines:”

Well, that’s the weather forecast, anyway, although this being England I have my doubts.

Anyway, I’ll be going to the Hay Festival this weekend, talking on a couple of panels Monday, and mainly soaking up whatever there is to soak up (which I hope doesn’t include rain.)

The second post yesterday was “Nobody Cares About the Deficit:”

Sitting here in the UK, where everyone continues to believe that budget deficits are the central issue despite overwhelming evidence to the contrary, it’s refreshing to look home once in a while and contemplate the utter collapse of the deficit-scold agenda.

One way to see this is to track the disappearance of Alan Simpsonfrom the radar; another is to look at polls that ask people to name important issues. For example, CNN/ORC has been asking consistent questions for several years; here’s the percentage of voters naming the budget deficit as the most important issue:

January 2013: 23 percent

May/June 2014: 15 percent

Sept. 2014: 8 percent

In the most recent CBS/NYTimes poll, which was open-ended, the deficit didn’t even make it onto the list.

And you know what? The public is right, and the Very Serious People were and are wrong.

The last post yesterday was “Tariffs Versus Currencies:”

While it’s not remotely in the same league as the execrable Daley op-ed, the CEA report in support of TPP is, as Josh Bivens notes, an odd document. It’s not wrong, or not mostly wrong — I don’t even share all of Bivens’s complaints. It’s just off-topic; at best, it’s a celebration of the results of all the trade liberalization that has taken place since the 1930s, and tells us nothing about policy when trade barriers are already very low, and “trade” agreements are actually about investment and intellectual property.

As I said, the report doesn’t make any clearly false claims — I do think Furman et al are too scrupulous for that. But there is some missing context. The very first bullet point declares, in bold type, that

U.S. businesses must overcome an average tariff hurdle of 6.8 percent, in addition to numerous non-tariff barriers (NTBs), to serve the roughly 95 percent of the world’s customers outside our borders.

You’re clearly meant to think of 6.8 as a big number. Is it?

Actually, no. There are various ways to think about that; one is to compare those tariffs with the kind of currency fluctuations that occur all the time. Here’s the recent history of the dollar:

That’s a 20 percent rise between the summer of last year and early 2015, partly given back recently. Since inflation is low everywhere, that’s more or less one-for-one a loss in competitiveness by US exporters, and far bigger than the tariff barriers.

Non-tariff barriers (NTBs) add to the wedge, of course. But even they are no big deal (NDB).

Krugman’s blog, 5/19/15

May 20, 2015

There was one more post yesterday, posted after people on this side of the pond were awake.  Here’s “The Mis-selling of TPP:”

One of the great blog posts of all time was from Daniel Davies, who declared — apropos of Iraq — that

Good ideas do not need lots of lies told about them in order to gain public acceptance.

It’s a good dictum; and if you see a lot of lies, or at least misdirection, being used to sell a policy you should be very, very concerned about said policy.

And the selling of TPP just keeps getting worse.

William Daley’s pro-TPP op-ed in today’s Times is just awful, on multiple levels. No acknowledgment that the real arguments are not about trade but about intellectual property and dispute settlement; on top of that a crude mercantilist claim that trade liberalization is good because it means more exports; some Dean Baker bait with numbers — $31 billion in trade surplus! All of 0.2 percent of GDP!

But what really annoyed me, even if it’s not necessarily the worst bit, was this:

But today, of the 40 largest economies, the United States ranks 39th in the share of our gross domestic product that comes from exports. This is because our products face very high barriers to entry overseas in the form of tariffs, quotas and outright discrimination.

Actually, no. We have a low export share because we’re a big country. Here’s population versus exports as a percentage of GDP for OECD countries:

Population isn’t the only determinant — geography matters too, as the contrast between Luxembourg (in the middle of Europe) and Iceland shows. But claiming that the relatively low US export share says anything at all about trade barriers makes me want to bang my head against a wall.

If this is the best TPP advocates can come up with, this is not looking like a good idea.

Krugman’s blog, early 5/19/15

May 19, 2015

He’s either in Yurp or he never sleeps.  Here are two posts from EARLY this morning.  The first is “Trade and the Decline of U.S. Manufacturing Employment:”

As Matthew Yglesias notes, many people believe that US manufacturing has disappeared because it has all moved to China and Mexico — but they’re largely wrong. I’m not sure that pointing to measures of industrial production is the bet way to make this point, however. A better approach, or so I’d argue, is to ask how much of the decline in manufacturing employment would have been avoided if we weren’t running big trade deficits.

Let’s start with the US trade balance in manufactured goods. Or actually let’s use a pretty good proxy that’s easy to pull up from FRED, the nonag-nonoil balance — non-agricultural exports minus non-petroleum imports. Here it is as a share of GDP:

We had rough balance in this measure 40 years ago, exporting about as much in the way of manufactured goods as we imported; nowadays it’s a persistent deficit on the order of 3 percent of GDP. That 3 percent matters — it’s a pretty major obstacle in efforts to achieve full employment, because it’s a drag on the overall demand for US goods and services.

But it’s not the main explanation, or even close, for the decline in manufacturing employment as a share of the total, which is down around 15 points since 1970:

You might be tempted to say that the widening trade deficit in manufactures accounts for 20 percent of this long-term decline — 3 points out of 15 — but even that is an exaggeration, because not every dollar of manufactured exports (or imports) corresponds to a dollar of manufacturing value-added.

For the most part, in other words, declining manufacturing employment isn’t due to trade. Again, that doesn’t mean that trade deficits are OK, or that trade hasn’t had other effects. But even if we’d had a highly protectionist world or in some other way had blocked the move into trade deficit, we’d still have seen most of the great decline in industrial jobs.

The second post this morning was “Stupid Austerity Tricks:”

Against willful stupidity, the gods themselves contend in vain. So it’s no surprise that Simon Wren-Lewis is having a hard time of it. Still, it’s amazing just how dependent the pro-austerity camp has become on one dumb trick — misunderstanding, or pretending to misunderstand, the difference between levels and rates of change.

Take basic national income accounting (and ignore the foreign sector, for simplicity): the basic GDP identity is

GDP = C + I + G

or, if you want to look at changes,

Change in GDP = Change in C + Change in I + Change in G

If you’re trying to understand how fiscal policies — which affect both government purchases G and, via taxes and transfers, consumption C — move the economy, you can tell a story either in terms of levels or in terms of changes; in the end, it shouldn’t matter, because these stories should be consistent.

Now, the story Simon has been telling all along, and which I essentially picked up in my Guardian piece, is that the Cameron government did a lot of fiscal tightening in its first two years, but not much thereafter (illustrated in this case by cyclically adjusted balances):

Furthermore, almost everyone concedes that this is in fact what happened.

And what you’d expect from this time path of policy is that the current level of GDP would still be below what it would have been otherwise, but that the negative impact on the rate of growth of GDP would have occurred only in the first couple of years, not thereafter; hence the pickup in growth since 2013 isn’t inconsistent with the view that austerity is a drag on the economy. I don’t think this is a hard point; surely it’s not a point anyone who writes regularly on economics should have trouble getting straight.

Yet what we get over and over are pieces that get this simple point wrong. Austerity critics say that the pace of fiscal tightening slowed after 2012 — aha, you’re claiming that austerity was reversed, which it wasn’t! You said that cutting spending depresses the economy relative to where it would have been otherwise — aha, you’re all wrong, because the economy started growing again in 2013!

This is, not to put too fine a point on it, stupid — and it has to be willfully stupid, because the people writing such stuff have to know better.

I’m actually used to such things; people are constantly pulling phrases out of stuff I’ve written, claiming that I was saying something I wasn’t. The way to assess such claims is to look at the overall shape of the argument I was making. If, for example, I was writing many pieces about the dangers of a slow, jobless recovery, then no, I wasn’t endorsing the Obama administration’s forecast of a V-shaped recovery, even if you can find a pull-quote that, taken out of context, might be read to say that; and so on.

Anyway, what you really learn from this “debate” is how weak one side really is. If you can’t make your argument without messing up levels versus changes and deliberately misreading simple statements, you must not have much of a case.

Krugman’s blog, 5/18/15 and a few days back

May 18, 2015

We’ll start with 5/18 and work backwards…  On 5/18 there were 3 posts.  First up, “Tyrannical Canadian Initiative:”

Things that make you say “Eh”:

In a recent study, a quarter of America’s schoolchildren thought Canada was a dictatorship.

Never underestimate the stupidity of Americans when it comes to any other country…  Next up from 5/18 we have “Dunning-Kruger Economics:”

I’ve mused in the past about a curious phenomenon: the evident preference of many on the right not just for economic hacks, which is understandable, but for incompetent hacks, who keep embarrassing themselves by getting very simple things wrong — who don’t, for example, seem to know how to read economic data, get confused about real versus nominal, are suckers for crank sites like Shadowstats, and so on. And these favorites of the right do it over and over again, apparently so bad at this facts-and-logic thing that they don’t even realize that they don’t know what they’re doing.

Simon Wren-Lewis takes on a UK version.

And the third offering from 5/18 is “Wormholes of Manhattan:”

The FT informs us that Amazon is now making deliveries in New York using the subway system:

Two delivery workers pushing large trolleys of Amazon parcels on the subway said the company was using underground trains for most Prime Now deliveries because traffic on Manhattan’s gridlocked streets made it impossible to honour a 60-minute guarantee.

Good for them — delivery trucks are actually a big source of negative externalities in New York, so getting them off the streets — even at the expense of more crowded subways — has to be a good thing.

But let me say that the article is slightly unfair in attributing the subways’ advantage solely to traffic congestion. The New York subways are actually almost miraculous in their ability — I know, only most of the time — to get you uptown or downtown incredibly fast. (Crosstown, not so much). The secret is the four-track system, with express trains running in the middle and locals on the sides. Those expresses, stopping only every 25 or 30 blocks (between 1.2 and 1.5 miles) seem almost to take you instantaneously across large distances.

For me, and for other people I know, that unique feature plays a surprisingly large role in making New York life easy and productive.

On 5/17 there were two posts, one of which was “Trade and Trust:”

I’m getting increasingly unhappy with the way the Obama administration is handling the dispute over TPP. I understand the case for the deal, and while I still lean negative I’m not one of those who believes that it would be an utter disaster.

But the administration — and the president himself — don’t help their position by being dismissive of the complaints and lecturing the critics (Elizabeth Warren in particular) about how they just have no idea what they’re talking about. That would not be a smart strategy even if the administration had its facts completely straight — and it doesn’t. Instead, assurances about what is and isn’t in the deal keep turning out to be untrue. We were assured that the dispute settlement procedure couldn’t be used to force changes in domestic laws; actually, it apparently could. We were told that TPP couldn’t be used to undermine financial reform; again, it appears that it could.

How important are these concerns? It’s hard to judge. But the administration is in effect saying trust us, then repeatedly bobbling questions about the deal in a way that undermines that very trust.

The other post from 5/17 was “Money, Inflation, and Models:”

One thing I often say to disbelieving audiences is that these past 7 or so years have actually been marked by a remarkable triumph of economic modeling: the predictions of Hicks-type liquidity trap analysis were startling and indeed ridiculed by many, but all came true. And for pedagogical purposes I thought it might be useful to have a graphical illustration of that point.

Consider the relationship between the monetary base — bank reserves plus currency in circulation — and the price level. Normal equilibrium macro models say that there should be a proportional relationship — increase the monetary base by 400 percent, and the price level should also rise by 400 percent. And the historical record seems to confirm this idea. Back in 2008-2009 a lot of people were passing around charts like this one, which shows annual rates of money base growth and consumer prices over the period from 1980-2007:

It seemed totally obvious to many people that with the Fed adding to the monetary base at breakneck speed, high inflation just had to be around the corner. That’s what history told us, right?

Except that those who knew their Hicks declared that this time was different, that in a liquidity trap the rise in the monetary base wouldn’t be inflationary at all (and that the relevant history was from Japan since the 1990s and from the 1930s, which seemed to confirm this claim). And so it proved, as shown by the red marker down at the bottom.

This is actually wonderful: economic theory used to make a prediction about events far outside usual experience, with the theory’s predictions very much at odds with the conventional wisdom of practical men — and the theory was right. True, basically nobody has changed his mind — the people who predicted runaway inflation remain utterly convinced that they know how the world works. But you can’t have everything.

On 5/16 there was one post, “Blinkers and Lies:”

Jeb Bush definitely did us a favor: in his attempts to avoid talking about the past, he ended up bringing back a discussion people have been trying to avoid. And they are, of course, still trying to avoid it — they want to make this just about the horserace, or about the hypothetical of “if you knew what we know now”.

For that formulation is itself an evasion, as Josh Marshall, Greg Sargent, and Duncan Black point out — each making a slightly different but crucial point.

First, as Josh says, Iraq was not a good faith mistake. Bush and Cheney didn’t sit down with the intelligence community, ask for their best assessment of the situation, and then reluctantly conclude that war was the only option. They decided right at the beginning — literally before the dust of 9/11 had settled — to use a terrorist attack by religious extremists as an excuse to go after a secular regime that, evil as it was, had nothing to do with that attack. To make the case for the splendid little war they expected to fight, they deliberately misled the public, making an essentially fake case about WMD — because chemical weapons, which many believed Saddam had, are nothing like the nukes they implied he was working on — and insinuating the false claim that Saddam was behind 9/11.

Second, as Greg says, even this isn’t hindsight. It was quite clear at the time that the case for war was fake — God knows I thought it was glaringly obvious, and tried to tell people — and fairly obvious as well that the attempt to create a pro-American Iraq after the invasion was likely to be an expensive failure. The question for war supporters shouldn’t be, would you have been a supporter knowing what you know now. It should be, why didn’t you see the obvious back then?

Finally, and this is where Atrios comes in, part of the answer is that a lot of Very Serious People were effectively in on the con. They, too, were looking forward to a splendid little war; or they were eager to burnish their non-hippie credentials by saying, hey, look, I’m a warmonger too; or they shied away from acknowledging the obvious lies because that would have been partisan, and they pride themselves on being centrists. And now, of course, they are very anxious not to revisit their actions back then.

Can we think about the economic debate the same way? Yes, although it’s arguably not quite as stark. Consider the long period when Paul Ryan was held up as the very model of a serious, honest, conservative. It was obvious from the beginning, if you were willing to do even a bit of homework, that he was a fraud, and that his alleged concern about the deficit was just a cover for the real goal of dismantling the welfare state. Even the inflation craziness may be best explained in terms of the political agenda: people on the right were furious with the Fed for, as they saw it, heading off the fiscal crisis they wanted to justify their anti-social-insurance crusade, so they put pressure on the Fed to stop doing its job.

And the Very Serious People enabled all this, much as they enabled the Iraq lies.

But back to Iraq: the crucial thing to understand is that the invasion wasn’t a mistake, it was a crime. We were lied into war. And we shouldn’t let that ugly truth be forgotten.

Amen.  And how Colin Powell can look at himself in the mirror every morning without vomiting is a mystery to me.   And there was one post on 5/15, “Broken Windows and American Oligarchy:”

Economic Policy Institute

Some years ago I gave a talk to a group of businesspeople — I don’t remember the occasion — and afterward, during the drink and mingle part of the event, had a conversation about executive pay. Quite a few of the businesspeople themselves thought that pay had grown excessive, but what has remained with me was the explanation one guy offered, more or less seriously: it’s all the fault of Monday Night Football.

His story went like this: when games started being televised, the financial rewards to winning teams shot up, and star players began being offered big salaries. And CEOs, who watch a lot of football, noticed — and started saying to themselves, “Why not me?” If salaries were set in any kind of competitive marketplace, that wouldn’t have mattered, but they aren’t — CEOs appoint the committees that decide how much they’re worth, and are restrained only by norms about what seems like too much. Football, so my conversation partner averred, started the breakdown of those norms, and we were off to the races.

By the way, the timing is about right.

Now, this sounds ridiculous — surely huge historical changes must have deeper roots. But I found myself thinking about this conversation when reading this interesting post by Vera te Velde on tests of the “broken windows” theory, which says that people are more likely to break social norms if they see other people violating norms, even if there’s no direct connection — you grab handbags if you see graffiti, you litter if you hear people ignoring noise ordinances, etc.. As she notes, there is now overwhelming experimental evidence for that theory. So it’s not crazy to think that CEOs might start violating pay norms because they see quarterbacks getting big checks.

OK, you don’t have to place sole emphasis, or any emphasis at all, on football. The real point here is that the eruption of top incomes that began around 40 years ago need not have solid causes — it could be a case of contagious norms-breaking. This might also explain why movements of top incomes are so different in different countries, with the most obvious determinant being whether you speak English; think of it as an epidemic of broken windows in the United States, which spreads to countries that are culturally close to America but not so much elsewhere.

Very loose speculation, the sort of thing that once upon a time a serious economist wouldn’t put out there in the public sphere. But I see all these people saying stuff, and figured that I might as well … OK, never mind.

Krugman’s blog, 5/14/15

May 15, 2015

There was one post yesterday, “When Maestros Cry:”

Via Mark Thoma, today in liberal fascism: Apparently I’m part of the liberal speech police, blocking debate on important subjects, because I criticized Alan Greenspan for planning to headline a goldbug conference taking place next to the Fed’s annual Jackson Hole event. And it’s true — I used vicious, undemocratic tactics like calling attention to Greenspan’s record of bad predictions. I even used sarcasm and ridicule. And you know who else used sarcasm and ridicule? Hitler The Piranha Brothers.

It’s still quite amazing to see how thin-skinned such people are, their outraged cries of ill-treatment when faced with any kind of pushback (and most of all, of course, anyone who makes them look silly.) But there’s an extra bonus from this article: confirmation of just how bad this particular group is on economic substance, and how truly inappropriate Greenspan’s planned participation was.

For the author of the article declares Greenspan obviously correct to issue dire warnings about Fed policies — after all, the dollar’s value was dropping in terms of gold, which he takes to be self-evidently a sign of big trouble.

But the Fed doesn’t care about the price of gold, and its indifference has been justified by history. Gold has been anything but a stable store of value: if you bought gold in the late 1970s the real value of your investment fell 60 percent over the next few years. Nor has gold been a predictor of future inflation — actually, even in the 70s it was a lagging, not leading, indicator, and in recent years it was telling us nothing at all about inflation, past or future.

So Greenspan was planning to talk to a bunch of monetary cranks with a sideline in anti-gay activism (or maybe it’s the other way around). To do so is, of course, his right; to criticize him for his decision, and make fun of his bad judgment, is mine.

Krugman’s blog, 5/13/15

May 14, 2015

There was one post yesterday, “Fighting for History:”

And, I’m on the ground in England, jet-lagged but maybe ready to resume blogging. For today, just a quick thought inspired by two seemingly unrelated comments.

First, in a postmortem on the UK election Simon Wren-Lewis notes one failure of Labour in particular: it made no effort at all to fight the false narrative of Blair-Brown profligacy. Wren-Lewis writes,

I suspect within the Labour hierarchy the view was to look forward rather than go over the past, but you cannot abandon the writing of history to your opponents.

Meanwhile, Brian Beutler notes the very different ways Hillary Clinton and Jeb Bush are dealing with the legacies of the presidents who bore their surnames. Bill Clinton presided over an era of peace and immense prosperity; nonetheless, Hillary is breaking with some of his policy legacy, on issues from trade and financial regulation to criminal justice. George W. Bush presided over utter disaster on all fronts; nonetheless, Jeb is adopting the same policies and even turning to the same advisers.

These are, I think, related stories. Progressives tend to focus on the future, on what we do now; they are also, by inclination, open-minded and if anything eager to show their flexibility by changing their doctrine in the face of evidence. Conservatives cling to what they imagine to be eternal verities, and fiercely defend their legends.

In policy terms the progressive instinct is surely superior. It’s actually quite horrifying, if you think about it, to hear Republican contenders for president unveil their big ideas, which are to slash taxes on rich people, deregulate banks, and bomb or invade countries we don’t like. What could go wrong?

But I’m with Wren-Lewis here: progressives are much too willing to cede history to the other side. Legends about the past matter. Really bad economics flourishes in part because Republicans constantly extol the Reagan record, while Democrats rarely mention how shabby that record was compared with the growth in jobs and incomes under Clinton. The combination of lies, incompetence, and corruption that made the Iraq venture the moral and policy disaster it was should not be allowed to slip into the mists.

And it’s not just an American issue. Europe’s problems are made significantly worse by the selectivity of German historical memory, in which the 1923 inflation looms large but the Brüning deflation of 1930-32, which actually led directly to the fall of Weimar and the rise of you-know-who, has been sent down the memory hole.

There’s a reason conservatives constantly publish books and articles glorifying Harding and Coolidge while sliming FDR; there’s a reason they’re still running against Jimmy Carter; and there’s a reason they’re doing their best to rehabilitate W. And progressives need to fight back.

Krugman’s blog, 5/11/15

May 12, 2015

There was one post yesterday, “Interest Rates Are Still Very Low:”

Sorry about blog silence; still trying to get as much as possible of my great office cull done before I leave for England. Here’s the scene right now:

But I thought I should take time out for a public service announcement — a reminder that despite having bounced recently, interest rates, especially in Europe, are still very low.

People are, understandably, reeling a bit from this:

But it’s important to understand that 0.6 percent is still a very, very low rate by any historical standard. And if you look at yields on index bonds, you find that German real rates are still strongly negative.

One way to say this is that the financial data still point to lowflation and maybe secular stagnation, just not as strongly as they did a couple of months ago.

Krugman’s blog, 5/7, 5/8 and 5/9/15

May 11, 2015

There was one post on 5/7, three on 5/8, and one on 5/9.  He didn’t post to the blog yesterday.  On 5/7 he posted “British Sovereign Risk, 2010:”

It’s election day in Britain, and God knows what will happen. But a lot of the campaign has revolved around the question of what was really going on in the spring of 2010. Cameron/Osborne want everyone to believe that Britain was in crisis, and was saved only by austerity. Is that really how it was?

Not according to the markets. Interest rates in the UK were low, but it’s not easy to use rate spreads as an assessment of risk — the way you can for eurozone countries — because Britain borrows in its own currency. So this is one place where CDS spreads may be informative.

Here, then, are CDS spreads in and around the election period of 2010, as reported by the Atlanta Fed:

The UK is that line at the bottom, just above the United States. (I continue to be bemused by the very idea of CDS on US debt, since a world with America in default is probably one of Mad Max anarchy, but never mind.) What you see is that the markets were never worried, at all, about British solvency.

The first post on 5/8 was “The Economy and the British Election:”

Just a reminder: The overwhelming evidence for US elections is that they are not judgements of an administration’s overall performance — they are driven by the rate of growth just ahead of the election, as in the chart above (taken from Larry Bartels.) (Any pointers to UK-specific work along the same lines would be welcome.) I’ve also put in the closest growth number I could get to the one Bartels uses for the US, taken from the ONS.

So you want to think of the economic environment for yesterday’s election as being roughly comparable to that facing Clinton in 1996. Pre-election polls suggested a close vote, but given that environment, we really shouldn’t be surprised that the incumbents did well.

That’s not to say that other things, like the distortions of mediamacro (driven by the overwhelming anti-Labour bias of the press) played no role.

The second post on 5/8 was “Stop-Go Austerity and Self-Defeating Recoveries:”

Sometimes good things happen to bad ideas. Actually, it happens all the time. Britain’s election results came as a surprise, but they were consistent with the general proposition that elections hinge not on an incumbent’s overall record but on whether things are improving in the six months or so before the vote. Cameron and company imposed austerity for a couple of years, then paused, and the economy picked up enough during the lull to give them a chance to make the same mistakes all over again.

They’ll probably seize that chance. And given the continuing weakness of British fundamentals – high household debt, a soaring trade deficit, etc. – there’s a good chance that the resumption of austerity will usher in another era of stagnation. In other words, the recovery of 2013-5, which is falsely viewed as a vindication of austerity, is likely to prove self-defeating.

There’s a somewhat similar problem in the euro area, as Barry Eichengreen noted recently. There, too, growth has picked up, thanks to a pause in austerity, quantitative easing and a weaker euro. The policies that pulled Europe back from the brink were made politically possible by fear, first of collapse, then of deflation. But as the fear abates, so does pressure to change Europe’s ways; austerians are already claiming the pickup as vindication, not of Draghi’s activism, but of the policies that made that activism necessary.

Obviously my pessimism here could be all wrong; if the private sector in Britain or Europe has more oomph that I think, growth can continue even with policy backsliding. But my guess is that we’re looking at an era of stop-go austerity, in which politicians who refuse to learn the right lessons from history doom their citizens to repeat it.

5/8’s third post was “What I Missed (Personal and Meta):”

The past is a cluttered country
The past is a cluttered country

My new office at the CUNY Graduate Center is small — so is my Princeton office, but it has more shelf space, not to mention enough books stacked on the floor to get me warnings from the fire marshal. So I’m culling my three-and-a-half decade collection drastically. The picture above shows the books I put out to be taken away today, which was day three; the books from the previous two days have already been taken away, and I expect to need all weekend to finish.

Many of the books I’m keeping are old conference volumes; for the most part, when I pick them up and wonder where they came from, it turns out that there’s a paper of mine inside. Either I had forgotten where that piece was published, or I had forgotten even writing it; if you’re a young academic reading this, trust me, it will happen to you.

Anyway, many of the forgotten conferences were about the Asian financial crisis of the 1990s, and when I look at my own papers, I see the elaboration of a basic theme. The crisis, I and others declared, was largely about debt, leverage, and balance sheets. There was compelling reason, we said, to believe that these factors created multiple equilibria, with self-fulfilling panic a real possibility. And in a couple of places I suggested that while the Asian crisis crucially involved exchange rates and debt in foreign currencies, essentially similar stories could unfold involving other asset prices.

So you can see why I bristle a bit at suggestions that economists don’t understand the possible role of nonlinearities, of multiple equilibria, of animal spirits, etc. etc.. I wrote so much about all that that I can’t even remember writing it!

And so I anticipated and predicted the actual crisis of 2008, right? Wrong. I had all the intellectual tools I needed, I even diagnosed a housing bubble, but I somehow failed to put the pieces together. Maybe I wasn’t as completely surprised as people who believed in the inherent stability of modern economies, and I caught on fast once the thing happened, but no, I didn’t see it coming.

Is there a moral here? I think it is that the world is a very complicated place, and it’s way too easy to miss what you should see even if your analytical framework is pretty decent. For me, at least, the great crisis came as a surprise but not a shock, something I didn’t see coming but not a deep problem for my sense of how the world works. Still, I do wish I’d paid more attention to the right things.

Saturday’s post was “Lost in Translation (Personal and Trivial):”

My office excavations have now dug down to a primitive early level in my history, containing various translations of my first trade book,The Age of Diminished Expectations. The Italians, it seems, wanted to put a Hannibal Lecter spin on it:

Or maybe they wanted to replace the invisible hand with the inaudible?

The Japanese had some interesting ideas about my sartorial tastes:

No particular moral, except that when it comes to such matters you can only hope that the ideas are more or less conveyed.

Krugman’s blog, 5/6/15

May 7, 2015

There were two posts yesterday.  The first was “The Worst Ex-Chairman Ever:”

When Alan Greenspan left the Fed, he had nearly divine status in the eyes of the financial press and, I’m sorry to say, quite a few economists. In retrospect, of course, his reputation has faltered badly; whether or not you blame Fed policy for the housing bubble (you shouldn’t), Greenspan denied the bubble’s existence and even its possibility as it was inflating, while actively blocking efforts to tighten financial regulation.

But it’s his track record since leaving office that is truly remarkable. He has been an inflation and debt fear monger, helping to make his successor’s already hard job a bit harder — and famously complained about ungrateful markets that keep failing to deliver the crises he predicts. After a brief moment of doubt about the wisdom of financial markets, he went right back to denouncing regulation while proclaiming that markets get it right “with notably rare exceptions”.

Now I have in my inbox a notice that as the Fed holds its annual meeting in Jackson Hole, Greenspan will address a counter-conference organized by a group called the American Principles Project. The group combines social conservatism — it’s anti-gay-marriage, anti-abortion rights, and pro-“religious liberty” — with goldbug economic doctrine.

The second half of this agenda may be appealing to Greenspan, a former Ayn Rand intimate — as Paul Samuelson remarked, “You can take the boy out of the cult but you can’t take the cult out of the boy.” But the anti-gay stuff? And helping these people attack his former colleagues?


Yesterday’s second post was “The Fed Does Not Control the Money Supply:”

Brad DeLong points us to David Glasner on John Taylor; I don’t think I need to add to the pile-on. But I do think Glasner misses a point when he says that

the quantity of money, unlike the Fed Funds rate, is not an instrument under the direct control of the Fed.

Actually, under current conditions — in a liquidity trap — it’s not even under the indirect control of the Fed. The same impotence of conventional monetary policy that makes open-market purchases of Treasuries useless at boosting GDP also mean that broad monetary aggregates that include deposits are largely immune to Fed influence. The Fed can stuff the banks full of reserves, but at zero rates those reserves have no incentive to go anywhere, and even if they do they can sit in safes and mattresses.

This is not a new point. Back in 1998 I covered it pretty well:

Putting financial intermediation into a liquidity trap framework suggests, pace Friedman and Schwartz, that it is quite misleading to look at monetary aggregates under these circumstances: in a liquidity trap, the central bank may well find that it cannot increase broader monetary aggregates, that increments to the monetary base are simply added to reserves and currency holdings, and thus both that such aggregates are no longer valid indicators of the stance of monetary policy and that their failure to rise does not indicate that the essential problem lies in the banking sector.

The effects of quantitative easing in Japan a few years later, which failed to raise M2, confirmed this conclusion. And sure enough, here’s what happened to US M2 as the Fed increased the size of its balance sheet:

By the way, in discussing monetary policy I sometimes write “money supply” as shorthand for “monetary base”; it has always been clear, if you read my work, that I know that the Fed only truly controls the base and that this need not translate into changes in broader aggregates.

So we had a simple prediction, completely borne out by experience. And you can therefore understand why I want to bang my head against the wall when economists say things along the lines of “the Fed can just target the money supply” or “we would have had runaway inflation except that for some reason banks just increased excess reserves — who could have predicted?”

So much heavy going over such basically simple stuff. But then, to expand on and somewhat ruin Upton Sinclair, it’s difficult to get a man to understand something when he has strong incentives, which may be ideological rather than or in addition to financial, not to understand it.

Krugman’s blog, 5/4 and 5/5/15

May 6, 2015

There were three posts on Monday and one yesterday.  The first post on Monday was “Mediamacro Crosses the Atlantic:”

Simon Wren-Lewis has been on a lonely crusade against “mediamacro”, a narrative about the British economy that is untrue — or at the very least easily challenged and at odds with textbook economics — yet is stated in the news media not as a hypothesis but as a fact.

Sure enough, Dan Balz writes about Britain in the Washington Post, in what I think is supposed to be a news analysis rather than an opinion piece, and states the mediamacro narrative as simply the truth about Britain, with nary a hint even that anyone disagrees with the story.

While I’m at it, a bit of further evidence on the bogosity of claims that Labour was wildly irresponsible. Look at the IMF’s Article IV consultation from 2006. Article IVs are regular consultations intended to serve as a kind of early warning system; Fund staff review a country’s economy and policies and make non-binding recommendations. These consultations turn out to be valuable historical documents, because they provide evidence of the conventional wisdom at the time they were released.

Here’s the fiscal analysis from that report:


At the time, the IMF — like everyone else — believed that Britain was roughly at full employment (not, as is currently claimed, vastly overheated), so that the modest headline budget deficit was more or less equal to the structural deficit, and it projected a stable, low ratio of debt to GDP in the years ahead. Not a hint of concerns about fiscal profligacy.

It’s really astonishing that a narrative so much at odds with this easily checked recent history has completely taken over the discourse.

Monday’s second post was “Paranoia Strikes Derp:”

You may think that the big news story lately has been riots in Baltimore — or, if you have different priorities, either that boxing match or Kate’s baby. But in certain circles, the big thing has been the right-wing belief that operation Jade Helm 15, a military training exercise in Texas, is a cover for Obama to seize control of the state and force its citizens to accept universal health care at gunpoint.

No, really — and this is being taken seriously both by Ted Cruz and by the governor, who has ordered the National Guard to keep a watch on the feds and their possibly nefarious activities.

Before you pooh-pooh this, think about what would happen to a Democratic politician who gave similar credence to a left-wing conspiracy theory this far out. I can’t even think of what that conspiracy theory might be.

And this isn’t an isolated incident. You should think of the panic over the attack of the Obamacare black helicopters as being part of a continuum that runs through inflation truthers like Niall Ferguson and Amity Shlaes, who insist that the government is cooking the economic books, to QE conspiracy theorists like (sadly) John Taylor and Paul Ryan declaring that Bernanke only did it to bail out Obama, to the more general prevalence of inflation derp, the insistence that Weimar is just around the corner despite six or more years of failed predictions.

There’s something happening here. What it is ain’t exactly clear (although I have some ideas I’ll flesh out soon.) But it’s quite remarkable, and pretty scary.

Monday’s last post was “Explaining US Inequality Exceptionalism:”

Disposable income in the United States is more unequally distributed than in most other advanced countries. But why? The answer to that question has important implications for our understanding of inequality more generally, and also for policies intended to reduce inequality. And new work by my colleagues Janet Gornick and Branko Milanovic at the CUNY Graduate Center’s Luxembourg Income Study Center shed light on the question, partly overturning what all of us believed until recently. They explain their findings in the first Research Brief in a new series launched on the LIS Center website.

The standard story up until now has been that the source of US inequality exceptionalism lies in the unusually low amount of redistribution we do through our tax and transfer system. Figure 1, based on LIS data, shows Gini coefficients before and after taxes and transfers for a number of advanced economies. The US after-tax-after-transfer Gini is the highest of the group, but its pre-tax-pre-transfer Gini – the inequality of market income – isn’t all that special. What this figure suggests, then, is that it’s all about redistribution rather than about market inequality.

But can this be right? We know that the US has unusually weak unions, a low minimum wage, an exceptionally wide skills premium and, of course, an exceptionally imperial one percent. Shouldn’t all this leave some mark on market income?

What Gornick and Milanovic realized (helped by suggestions from a number of colleagues, notably Larry Mishel at EPI) was that true US market inequality might be being masked by another exceptional piece of the US system – delayed retirement, causing many older households to have positive market income where comparable households in other countries have no or very little market income. Thus, putting all households together and looking at their pre-tax-pre-transfer income inequality makes other countries’ distributions appear comparatively more unequal because people in other countries are more likely to retire earlier than in the US (and hence have zero or low market income).

To correct for this possible problem, they recalculated the numbers for households containing only persons under age 60, getting Figure 2. The US remains the most unequal nation (after taxes and transfers), but now a main driver of that inequality is market inequality. In this figure, the US (along with Ireland and the UK) has market income inequality substantially higher than the rest of the countries. In other words, it is the distribution of wages and income from capital, independent of the fiscal system, that makes the US comparatively unequal. Indeed, America also does less redistribution than several other rich countries, European countries in particular, so that’s still part of the story, but it’s not the whole story or even most of it.

This result has strong relevance to policy debates. There has been considerable discussion lately of the “new” conventional wisdom on labor which argues that interventions to strengthen workers’ bargaining power can reduce inequality and raise wages with little or no damage to the economy. If it were really true that all international differences in inequality were due to after-market, tax-and-transfer interventions, this would cast doubt on the new view. But it turns out that market income distributions differ quite a lot – and the US emerges as among the most unequal.

So this is an important new result.

Yesterday’s post was “Veg-O-Matic Egonomics:”

All successful researchers have gigantic egos. If they didn’t — if they did not have, at the core of their being, a frightening level of intellectual arrogance — they would never have had the temerity to decide that they had insights denied to all the extremely clever scholars who preceded them. And it takes even more egotism to persist in the face of all the people who will, in fact, tell you that your insight is trivial, it’s wrong, and they said it in 1962.

So we’re all monsters, however nice we may seem in person. But there’s still the matter of self-awareness and self-control — the ability to set limits, to avoid the temptation to spend your life claiming that the insights you had decades ago were the final word on the subject, maybe even the final word on all subjects.

Which brings me to the case of John Taylor. Taylor has been harshly critical of the Fed, which he claims caused the financial crisis by failing to pursue his policy rule from the early 1990s precisely; Ben Bernanke, now that he’s free to speak his mind, has responded by firmly smacking Taylor upside the head. Taylor has lashed back. And it’s really sad.

It’s not just that, as Tony Yates patiently explains, Taylor’s claims about the proven optimality of his rule are just false. (Maybe it is optimal, but it’s far from proved, and there’s certainly no consensus.) More disturbing, at this point Taylor seems intent on selling his rule as the Veg-O-Matic of economic policies. It slices! It dices! It solves the problem of the zero lower bound! (As Yates says, this claim appears incomprehensible.)

In fact — and I wish both Yates and Bernanke were clearer about this — Taylor’s central claim about the alleged errors of monetary policy is bizarre. The Taylor rule was and is a clever heuristic for describing how central banks try to steer between unemployment and inflation, and perhaps a useful guide to how they ought to behave in normal times. But it says nothing at all about bubbles and financial crises; financial instability is impossible in the models usually used to justify the rule, and the rule wasn’t devised with such possibilities in mind. It makes no sense, then, to claim that following the rule just so happens to be exactly what we need to avoid crises. It slices! It dices! It prevents housing bubbles and stabilizes the financial system! No, I don’t think so.

As I said, it’s all very sad.


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