Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 1/14/17

January 15, 2017

There was one post yesterday, “Infrastructure Delusions:”


Wikiality.com

Ben Bernanke has a longish post about fiscal policy in the Caligula Trump era. It’s not the most entertaining read; perhaps because of the political fraughtness of the moment, Bernanke has reverted a bit to Fedspeak. But there’s some solid insight, a lot of it pretty much in line with what I have been saying.

Notably, Bernanke, like yours truly, argues that the fiscal-stimulus case for deficit spending has gotten much weaker, but there’s still a case for borrowing to build infrastructure:

When I was Fed chair, I argued on a number of occasions against fiscal austerity (tax increases, spending cuts). The economy at the time was suffering from high unemployment, and with monetary policy operating close to its limits, I pushed (unsuccessfully) for fiscal policies to increase aggregate demand and job creation. Today, with the economy approaching full employment, the need for demand-side stimulus, while perhaps not entirely gone, is surely much less than it was three or four years ago. There is still a case for fiscal policy action today, but to increase output without unduly increasing inflation the focus should be on improving productivity and aggregate supply—for example, through improved public infrastructure that makes our economy more efficient or tax reforms that promote private capital investment.

But he gently expresses doubt that this kind of thing is actually going to happen:

In particular, will Republicans be willing to support big increases in spending, including infrastructure spending? Alternatively, if Congress opts to reduce the deficit impact of an infrastructure program by financing it through tax credits and public-private partnerships, as candidate Trump proposed, the program might turn out to be relatively small.

Let me be less gentle: there will be no significant public investment program, for two reasons.

First, Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top; they aren’t even talking about public investment, and would probably drag their feet even if Trump came forward with a detailed plan and made it a priority.

But this then raises the obvious question: who really believes that this crew is going to come up with a serious plan? Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program.

So investors betting on a big infrastructure push are almost surely deluding themselves. We may see some conspicuous privatizations, especially if they come with naming opportunities: maybe putting in new light fixtures will let him rename Hoover Dam as Trump Dam? But little or no real investment is coming.

Krugman’s blog, 1/10/17

January 11, 2017

There was one post yesterday, “There Will Be No Obamacare Replacement:”

You may be surprised at the evident panic now seizing Republicans, who finally — thanks to James Comey and Vladimir Putin — are in a position to do what they always wanted, and kill Obamacare. How can it be that they’re not ready with a replacement plan?

That is, you may be surprised if you spent the entire Obama era paying no attention to the substantive policy issues — which is a pretty good description of the Republicans, now that you think about it.

From the beginning, those of us who did think it through realized that anything like universal coverage could only be achieved in one of two ways: single payer, which was not going to be politically possible, or a three-legged stool of regulation, mandates, and subsidies. Here’s how I put it exactly 7 years ago:

Start with the proposition that we don’t want our fellow citizens denied coverage because of preexisting conditions — which is a very popular position, so much so that even conservatives generally share it, or at least pretend to.

So why not just impose community rating — no discrimination based on medical history?

Well, the answer, backed up by lots of real-world experience, is that this leads to an adverse-selection death spiral: healthy people choose to go uninsured until they get sick, leading to a poor risk pool, leading to high premiums, leading even more healthy people dropping out.

So you have to back community rating up with an individual mandate: people must be required to purchase insurance even if they don’t currently think they need it.

But what if they can’t afford insurance? Well, you have to have subsidies that cover part of premiums for lower-income Americans.

In short, you end up with the health care bill that’s about to get enacted. There’s hardly anything arbitrary about the structure: once the decision was made to rely on private insurers rather than a single-payer system — and look, single-payer wasn’t going to happen — it had to be more or less what we’re getting. It wasn’t about ideology, or greediness, it was about making the thing work.

It’s actually amazing how thoroughly the right turned a blind eye to this logic, and some — maybe even a majority — are still in denial. But this is as ironclad a policy argument as I’ve ever seen; and it means that you can’t tamper with the basic structure without throwing tens of millions of people out of coverage. You can’t even scale back the spending very much — Obamacare is somewhat underfunded as is.

Will they decide to go ahead anyway, and risk opening the eyes of working-class voters to the way they’ve been scammed? I have no idea. But if Republicans do end up paying a big political price for their willful policy ignorance, it couldn’t happen to more deserving people.

Krugman’s blog, 1/7/17

January 8, 2017

There was one post yesterday, “The Shock of the Normal:”

Some further thoughts on the macro situation: some of us spent years trying to convince others that the post-crisis environment changed the rules, especially for fiscal policy. Now we have a new problem: how to explain that the rules have (somewhat) changed back without leading to a lot of stupid gotchas, “You said that and now you say this”

The thing is, people like me or Simon Wren-Lewis have been consistent all along; and saying that the rules have changed back is just an application of the same basic framework that worked so well after 2008 — basically an updated version of IS-LM.

Again, think of aggregate demand as reflecting the interest rate, other things equal, while monetary policy normally leans against changes in GDP, so that there’s an upward-sloping LM curve — but because it’s really hard to cut rates below zero, that curve is flat at low levels of output. Short-run equilibrium of output and interest rates is where the IS and LM curves cross:

Now, suppose you’re considering the effects of policies that will, other things equal, raise or lower aggregate demand — that is, shift the IS curve. In normal circumstances, where the IS curve intersects an upward-sloping LM, such shifts have limited effects on output and employment, because they’re offset by changes in interest rates: fiscal expansion leads to crowding out, austerity to crowding in, and multipliers are low.

In the aftermath of the financial crisis, however, we spent an extended period at the ZLB, as shown by the “2010” IS curve. In those conditions, shifts in the IS curve don’t move interest rates, there is no crowding out (actually crowding in because increased sales lead to higher investment), and multipliers are large.

In that kind of world, prudence is folly and virtue is vice. Almost anything that leads to higher spending is a good thing; we were in coalmines and aliens territory.

Even at the time, however, I tried to explain that this wouldn’t always be the case. From the linked post:

Oh, and let’s always remember that Keynesians like me don’t believe that thing like the paradox of thrift and the paradox of flexibility are the way the economy normally works. They’re very much exceptional, applying only when interest rates are up against the zero lower bound. Unfortunately, that happens to be the world we’re currently living in.

So are we still there? No. Wages are finally rising, quit rates are back to pre-crisis levels, so we seem to be fairly close to full employment, and the Fed is raising rates. So it now looks like the “2017” IS curve in the figure. We’re just barely over the border into normality, which is why I think the Fed should hold and we could still use some fiscal stimulus for insurance, and very low rates still make the case for lots of infrastructure spending. But it’s not the same as it was.

Or actually it’s not the same in the U.S.. Europe is still fairly deep in the liquidity trap.

The point here is that argument by gotcha is even worse now than usual. If you see progressive economists saying different things about Trump deficits than they said about Obama deficits, it’s because the situation has changed, and the very same models that called for fiscal stimulus when Republicans pretended to be fiscally responsible say that deficits are no longer good now that they’re showing what they always were.

Krugman’s blog, 1/6/17

January 7, 2017

There was one post yesterday, “Macrohypocrisy:”

Paul Waldman has a righteous rant on Congressional Republicans, who posed as the hawkiest of deficit hawks as long as a Democrat was in the White House, but are now fine with huge debt increases under Trump. But really, is anyone except the fiscal scolds surprised? The fraudulence and flim-flam of GOP deficit poseurs was obvious all along.

What is true is that the GOP flip-flop – flim-flam-flop? – is especially noteworthy because of the macroeconomic timing. Deficits were the ultimate evil when the economy was depressed, monetary policy was stymied by the zero lower bound, and we really needed fiscal expansion. Now deficits are fine at precisely the moment when the economy seems to be fairly close to full employment, the Fed is starting to hike rates, and the case for fiscal expansion, while not completely absent, is fairly subtle, resting mainly on the precautionary motive.

But will Republicans pay a price for their hypocrisy? Probably not: my guess is that professional centrists will move the center, as they always do, to declare both parties equally at fault, while the news media will continue to canonize Paul Ryan, who looks Very Serious as he instantly abandons all his supposed principles.

And meanwhile I and other Keynesians are getting mail accusing us of being the hypocrites: “You were for deficits when Obama was in, now they’re bad!”

But as I just said, the situation has changed.

Nobody knows precisely how close we are to full employment; we have very little reason to trust estimates of the NAIRU, if such a thing even exists at low inflation rates. However, some unambiguous indicators of labor market tightness clearly show an economy looking much more like its pre-crisis self than it did a few years ago. As the figure shows, wages are finally rising at a reasonable clip, and quit rates are more or less normal, suggesting that jobs are relatively easy to find.

I’d be a lot more comfortable about the state of affairs if we had more-or-less full employment along with an interest rate well clear of the ZLB, so that the Fed had evident room to cut in the next recession; the fact that we don’t is why I still think modest fiscal stimulus is appropriate, and so is monetary forbearance until inflation is higher. But it’s nothing like the situation in 2010.

When the macroeconomic situation changes, I change my policy recommendations. What do you do?

Krugman’s blog, 12/28/16

December 29, 2016

There was one post yesterday, “Greed Springs Eternal:”

Jonathan Chait catches Larry Kudlow praising the Orange One for choosing a cabinet of billionaires, because rich men are incorruptible — after all, they don’t need even more money. As Chait says, this is ludicrous on its face; consider, for example, Russia’s oligarchs.

What Chait doesn’t note is the special irony of seeing this argument from Kudlow, or indeed any right-wing advocate of supply-side economics. Remember, their whole worldview is based around the claim that cutting taxes on rich people will work economic miracles, because of incentives: let a plutocrat keep more of an extra dollar in income, and he’ll innovate, create jobs, lead us to an earthly paradise in order to get that extra income.

To belabor what should be obvious: either the wealthy care about having more money or they don’t. If lower marginal tax rates are an incentive to produce more, the prospect of personal gain is an incentive to engage in corrupt practices. You can’t go all Ayn Rand/Gordon Gekko on the importance of greed as a motivator while claiming that wealth insulates a man from temptation.

Now, for what it’s worth, the reality is clearly that even the insanely wealthy generally want more. You can ask why they want it; the hedonistic pleasures of luxury must surely top out at a tiny fraction of what the average Trump nominee is worth. Gold-plated toilets don’t flush any better than the usual kind. But for such people, money is about ego, power, winning the game. Greed has no limit.

But what’s more interesting and revealing, I think, is the way people like Kudlow for whom incentives are supposedly all suddenly say something completely different when it comes to conflicts of interest.

And this is telling us something significant: namely, that supply-side economic theory is and always was a sham. It was never about the incentives; it was just another excuse to make the rich richer.

Krugman’s blog, 12/26/16

December 27, 2016

There was one post yesterday, “Analytics of Trade Deficits and Manufacturing Employment (Very Wonkish):”

Serious critiques of one’s work can be thought-provoking, even when they mostly miss the point. So it is with this recent critique of my trade-and-jobs analysis by Tim Worstall. Worstall seems strangely unable to grasp that what EPI, Dean Baker, and yours truly are doing isn’t an analysis of the effects of trade deficits on overall employment, and even suggests that we are engaged in some kind of fallacy when asserting that trade deficits reduce manufacturing jobs. Hello — we’re talking about the sectoral mix of employment, about having fewer manufacturing and more service jobs.

Still, the critique inspired me to get a bit more formal about the analytics, and there is a small clarification I think I should make.

So here’s how I think about it (which is actually a fairly standard trade model approach): approximate the economy as consisting of two sectors, traded and nontraded, with traded goods being basically manufacturing. Assume full employment for the sake of argument; then production is always on the production possibility frontier, which is the downward-sloping line in the figure.

With balanced trade, production = consumption (plus investment, but lump them together); that’s point A. When the economy runs a trade deficit, however financed, consumption lies outside the PPF, at a point like B; this point normally involves moving out an expansion path along which consumption of both nontraded and traded goods rises. However, the increase in nontraded consumption must be met out of domestic production, which means that traded production falls.

So a trade deficit in manufacturing does correspond to a fall in manufacturing production.

Now, one slight twist is that because a trade deficit also corresponds to a rise in overall spending, part of that trade deficit reflects increased consumption of manufactures rather than reduced production; you can see this in the figure, where the fall in traded production is smaller than the deficit. Quantitatively, however, this effect should be fairly small, since value-added in manufacturing is less than 12 percent of GDP.

Bottom line: yes, trade deficits reduce manufacturing production and jobs. They played a significant although far from dominant role in manufacturing job losses after 2000.

Krugman’s blog, 12/25/16

December 26, 2016

There was one post yesterday, “The China Shock and the Trump Shock:”

Yes, it’s Christmas Day. Bah Humbug. Also, the family won’t get here for a few hours, and I wanted to put something out as background for tomorrow’s column.

So, I’m thinking about the Trump trade war, which is looking increasingly likely — especially because U.S. trade law gives the White House remarkable leeway to go protectionist without legislative action. That wasn’t the law’s intent; but do you think this guy will care?

What happens if the protectionist-in-chief goes ahead and does it, as I suspect he will?

Claims that there would be huge net job losses are extremely dubious. But what would happen would be a global trade war, which would disrupt the existing economic structure, which is built on elaborate international supply chains.

In the long run, a new structure with shorter chains would be built. But in the meantime, some industries, some factories, would end up becoming sudden losers — in the US as well as in developing countries.

The lesson I took from the widely cited Autor, Dorn, and Hanson paper on the China shock was that Ricardo and Heckscher-Ohlin were less relevant to the political economy of trade than the sheer pace of change, which disrupted local manufacturing concentrations and the communities they supported. The point is that a protectionist turn, reversing the trade growth that has already happened, would be the same kind of shock given where we are now. It’s like the old joke about the motorist who runs over a pedestrian, then tries to undo the damage by backing up — and runs over the victim a second time.

That is, I’d argue, the way to think about the coming Trump shock. You can’t really turn the clock back a quarter-century; but even trying can produce exactly the kind of rapid, disruptive shifts in production that fed blue-collar anger going into this election.

Krugman’s blog, 12/24/16

December 25, 2016

Merry Christmas.  As usual, I’ll be sparing you the prose stylings of Ross “Don’t” Douthat, or as I call him, the Pasty Little Putz.  You’re welcome.  Prof. Krugman had one post yesterday, “Don’t Blame Macroeconomics (Wonkish and Petty):”

Arguing about the state of economics seems like a distinctly secondary concern right now, especially arguing with people I agree with on most things. But Robert Skidelsky’s latest gets one big thing very wrong, and I think it matters for how we approach the general mess we’re in.

Skidelsky argues, quite correctly in my view, that economists have become far too inward-looking; they study models, and forget (or never knew) that these are only sketch maps of the territory, and that you always have to consider the possibility that the map is all wrong — which means that you need to supplement technical training with history, psychology, and just plain looking out there at the real world.

But his prime examples of economics malfeasance are, well, terrible:

Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t.

“Supposed to” according to whom? Not basic macroeconomics!

Look, we had a more or less standard model of macroeconomics when interest rates are near zero — IS-LM in some form. This model said and says that (a) monetary policy is ineffective under these conditions (b) fiscal multipliers are positive and large — in particular, fiscal contraction is strongly contractionary. And these predictions have been borne out! Huge monetary expansion didn’t raise inflation; extreme austerity was strongly correlated with severe economic downturns.

In other words, policy had exactly the effects it was “supposed to.”

Now, policymakers chose not to believe this. They chose to believe that monetary policy could do the job absent fiscal support, because for several reasons they refused to use fiscal policy to promote jobs; they chose to believe in the confidence fairy to justify attacks on the welfare state, because that’s what they wanted to do. And yes, some economists gave them cover.

But that’s a very different story from the claim that economics failed to offer useful guidance. On the contrary, it offered extremely useful guidance, which policymakers, for political reasons, chose to ignore.

Krugman’s blog, 12/19/16

December 20, 2016

There was one post yesterday, “Reality TV Populism:”

This Washington Post article on Poland — where a right-wing, anti-intellectual, nativist party now rules, and has garnered a lot of public support — is chilling for those of us who worry that Trumpism may really be the end of the road for US democracy. The supporters of Law and Justice clearly looked a lot like Trump’s white working class enthusiasts; so are we headed down the same path?

Well, there’s an important difference — a bit of American exceptionalism, if you like. Europe’s populist parties are actually populist; they pursue policies that really do help workers, as long as those workers are the right color and ethnicity. As someone put it, they’re selling a herrenvolk welfare state. Law and Justice has raised minimum wages and reduced the retirement age; France’s National Front advocates the same things.

Trump, however, is different. He said lots of things on the campaign trail, but his personnel choices indicate that in practice he’s going to be a standard hard-line economic-right Republican. His Congressional allies are revving up to dismantle Obamacare, privatize Medicare, and raise the retirement age. His pick for Labor Secretary is a fast-food tycoon who loathes minimum wage hikes. And his pick for top economic advisor is the king of trickle-down.

So in what sense is Trump a populist? Basically, he plays one on TV — he claims to stand for the common man, disparages elites, trashes political correctness; but it’s all for show. When it comes to substance, he’s pro-elite all the way.

It’s infuriating and dismaying that he managed to get away with this in the election. But that was all big talk. What happens when reality begins to hit? Repealing Obamacare will inflict huge harm on precisely the people who were most enthusiastic Trump supporters — people who somehow believed that their benefits would be left intact. What happens when they realize their mistake?

I wish I were confident in a coming moment of truth. I’m not. Given history, what we can count on is a massive effort to spin the coming working-class devastation as somehow being the fault of liberals, and for all I know it might work. (Think of how Britain’s Tories managed to shift blame for austerity onto Labour’s mythical fiscal irresponsibility.) But there is certainly an opportunity for Democrats coming.

And the indicated political strategy is clear: make Trump and company own all the hardship they’re about to inflict. No cooperation in devising an Obamacare replacement; no votes for Medicare privatization and increasing the retirement age. No bipartisan cover for the end of the TV illusion and the coming of plain old, ugly reality.

Krugman’s blog, 12/18/16

December 19, 2016

There was one post yesterday, “Will Fiscal Policy Really Be Expansionary?”:

It’s now generally accepted that Trumpism will finally involve the kind of fiscal stimulus progressive economists have been pleading for ever since the financial crisis. After all, Republicans are deeply worried about budget deficits when a Democrat is in the White House, but suddenly become fiscal doves when in control. And there really is no question that the deficit will go up.

But will this actually amount to fiscal stimulus? Right now it looks as if Republicans are going to ram through their whole agenda, including an end to Obamacare, privatizing Medicare and block-granting Medicaid, sharp cuts to food stamps, and so on. These are spending cuts, which will reduce the disposable income of lower- and middle-class Americans even as tax cuts raise the income of the wealthy. Given the sharp distributional changes, looking just at the budget deficit may be a poor guide to the macroeconomic impact.

Given the extent to which things are in flux, I can’t put numbers on what’s likely to happen. But I was able to find matching analyses by the good folks at CBPP of tax and spending cuts in Paul Ryan’s 2014 budget, which may be a useful model of things to come.

If you leave out the magic asterisks — closing of unspecified tax loopholes — that budget was a deficit-hiker: $5.7 trillion in tax cuts over 10 years, versus $5 trillion in spending cuts. The spending cuts involved cuts in discretionary spending plus huge cuts in programs that serve the poor and middle class; the tax cuts were, of course, very targeted on high incomes.

The pluses and minuses here would have quite different effects on demand. Cutting taxes on high incomes probably has a low multiplier: the wealthy are unlikely to be cash-constrained, and will save a large part of their windfall. Cutting discretionary spending has a large multiplier, because it directly cuts government purchases of goods and services; cutting programs for the poor probably has a pretty high multiplier too, because it reduces the income of many people who are living more or less hand to mouth.

Taking all this into account, that old Ryan plan would almost surely have been contractionary, not expansionary.

Will Trumponomics be any different? It would matter if there really were a large infrastructure push, but that’s becoming ever less plausible. There will be big tax cuts at the top, but as I said, the push to dismantle the safety net definitely seems to be on. Put it all together, and it’s extremely doubtful whether we’re talking about net fiscal stimulus.

Now, you might think that someone will explain this to Trump, and that he’ll demand a more Keynesian plan. But I have two words for you: Larry Kudlow.