Archive for the ‘Krugman’s Blog’ Category

Krugman’s blog, 6/29/15

June 30, 2015

There was one post yesterday, “The Awesome Gratuitousness of the Greek Crisis:”

Barry Eichengreen asks himself why his influential analysis, suggesting that the euro was irreversible now appears wrong. Surely in a direct, mechanical sense what we’re seeing is the process I warned about five years ago:

Think of it this way: the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling.

But doesn’t the ultimate cause lie in wild irresponsibility on the part of the Greek government? I’ve been looking back at the numbers, readily available from the IMF, and what strikes me is how relatively mild Greek fiscal problems looked on the eve of crisis.

In 2007, Greece had public debt of slightly more than 100 percent of GDP — high, but not out of line with levels that many countries including, for example, the UK have carried for decades and even generations at a stretch. It had a budget deficit of about 7 percent of GDP. If we think that normal times involve 2 percent growth and 2 percent inflation, a deficit of 4 percent of GDP would be consistent with a stable debt/GDP ratio; so the fiscal gap was around 3 points, not trivial but hardly something that should have been impossible to close.

Now, the IMF says that the structural deficit was much larger — but this reflects its estimate that the Greek economy was operating 10 percent above capacity, which I don’t believe for a minute. (The problem here is the way standard methods for estimating potential output cause any large slump to propagate back into a reinterpretation of history, interpreting the past as an unsustainable boom.)

So yes, Greece was overspending, but not by all that much. It was over indebted, but again not by all that much. How did this turn into a catastrophe that among other things saw debt soar to 170 percent of GDP despite savage austerity?

The euro straitjacket, plus inadequately expansionary monetary policy within the eurozone, are the obvious culprits. But that, surely, is the deep question here. If Europe as currently organized can turn medium-sized fiscal failings into this kind of nightmare, the system is fundamentally unworkable.

Krugman’s blog, 6/27 and 6/28/15

June 29, 2015

There was one post on Saturday, and one yesterday.  Saturday’s post was “Europe’s Moment of Truth:”

Until now, every warning about an imminent breakup of the euro has proved wrong. Governments, whatever they said during the election, give in to the demands of the troika; meanwhile, the ECB steps in to calm the markets. This process has held the currency together, but it has also perpetuated deeply destructive austerity — don’t let a few quarters of modest growth in some debtors obscure the immense cost of five years of mass unemployment.

As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.

It seems to me that the troika — I think it’s time to stop the pretense that anything changed, and go back to the old name — expected, or at least hoped, that Greece would be a repeat of this story. Either Tsipras would do the usual thing, abandoning much of his coalition and probably being forced into alliance with the center-right, or the Syriza government would fall. And it might yet happen.

But at least as of right now Tsipras seems unwilling to fall on his sword. Instead, faced with a troika ultimatum, he has scheduled a referendum on whether to accept. This is leading to much hand-wringing and declarations that he’s being irresponsible, but he is, in fact, doing the right thing, for two reasons.

First, if it wins the referendum, the Greek government will be empowered by democratic legitimacy, which still, I think, matters in Europe. (And if it doesn’t, we need to know that, too.)

Second, until now Syriza has been in an awkward place politically, with voters both furious at ever-greater demands for austerity and unwilling to leave the euro. It has always been hard to see how these desires could be reconciled; it’s even harder now. The referendum will, in effect, ask voters to choose their priority, and give Tsipras a mandate to do what he must if the troika pushes it all the way.

If you ask me, it has been an act of monstrous folly on the part of the creditor governments and institutions to push it to this point. But they have, and I can’t at all blame Tsipras for turning to the voters, instead of turning on them.

Yesterday’s post was “Grisis:”

OK, this is real: Greek banks closed, capital controls imposed. Grexit isn’t a hard stretch from here — the much feared mother of all bank runs has already happened, which means that the cost-benefit analysis starting from here is much more favorable to euro exit than it ever was before.

Clearly, though, some decisions now have to wait on the referendum.

I would vote no, for two reasons. First, much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Where is the hope in that? Maybe, just maybe, the willingness to leave will inspire a rethink, although probably not. But even so, devaluation couldn’t create that much more chaos than already exists, and would pave the way for eventual recovery, just as it has in many other times and places. Greece is not that different.

Second, the political implications of a yes vote would be deeply troubling. The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government. And even if you don’t like Syriza, that has to be disturbing for anyone who believes in European ideals.

A strange logistical note: I’m on semi-vacation this week, doing a bicycle trip in an undisclosed location. It’s only a semi-vacation because I didn’t negotiate any days off the column; I’ll be in tomorrow’s paper (hmm, I wonder what the subject is) and have worked the logistics so as to make Friday’s column doable too. I was planning to do little if any blogging, and will in any case do less than I might have otherwise given the events.

Krugman’s blog, 6/25/15

June 26, 2015

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

I’ve been staying fairly quiet on Greece, not wanting to shout Grexit in a crowded theater. But given reports from the negotiations in Brussels, something must be said — namely, what do the creditors, and in particular the IMF, think they’re doing?

This ought to be a negotiation about targets for the primary surplus, and then about debt relief that heads off endless future crises. And the Greek government has agreed to what are actually fairly high surplus targets, especially given the fact that the budget would be inhuge primary surplus if the economy weren’t so depressed. But the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts. So we’re still in the business of dictating domestic policy.

The supposed reason for the rejection of a tax-based response is that it will hurt growth. The obvious response is, are you kidding us? The people who utterly failed to see the damage austerity would do — see the chart, which compares the projections in the 2010 standby agreement with reality — are now lecturing others on growth? Furthermore, the growth concerns are all supply-side, in an economy surely operating at least 20 percent below capacity.

Talk to IMF people and they will go on about the impossibility of dealing with Syriza, their annoyance at the grandstanding, and so on. But we’re not in high school here. And right now it’s the creditors, much more than the Greeks, who keep moving the goalposts. So what is happening? Is the goal to break Syriza? Is it to force Greece into a presumably disastrous default, to encourage the others?

At this point it’s time to stop talking about “Graccident”; if Grexit happens it will be because the creditors, or at least the IMF, wanted it to happen.

Yesterday’s second post was “Regicide Relief:”

Update: Just to put this out there, and let my 60s roots show: Hey, hey, ACA, how many lives did you save today?

King (v Burwell) is dead, 6-3. Whew. I’ve been tuned in toSCOTUSblog, sort of watching out of the corner of my eye — and it’s too early for a drink! The invaluable Charles Gaba seems to be having his own reaction:

No, you haven’t — reminding everyone of the incredible harm from a bad ruling surely played some role in the good news.

Importantly, the court didn’t even allow wiggle room for a future Tea Party president to decide to cut off the money.

A very big day.

The last post yesterday was “The Court and the Three Legged Stool:”

Still on a high over the Supreme Court ruling. One especially gratifying and praiseworthy feature of the majority opinion was that it explicitly invoked the logic of health reform to justify the “interpretive jiggery-pokery” (can this be made into a dance step?) that so infuriated Scalia. From the opinion:

The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral. It is implausible that Congress meant the Act to operate in this manner. Congress made the guaranteed issue and community rating requirements applicable in every State in the Nation, but those requirements only work when combined with the coverage requirement and tax credits. It thus stands to reason that Congress meant for those provisions to apply in every State as well.

Yes! The Court (minus the three stooges) understood that the ACA is designed to work via the “three-legged stool” of guaranteed issue and community rating, the individual mandate, and subsidies. All three elements are needed to make it work, which is why it was obvious to anyone who paid any attention that the lawsuit was nonsense.

The thing is, a lot of people on the right have never grasped this logic, either because all they need to know is that Obamacare is eevil big government, or because of the Upton Sinclair principle of finding it difficult to understand something when your salary depends on your not understanding it. But the court majority did the basic policy analysis, which gratifies my inner wonk as well as my outer health reformer.

Krugman’s blog, 6/24/15

June 25, 2015

There were three posts yesterday.  The first was “Donkey Kong Economics:”

Bloomberg blazes new frontiers in article illustration; you can see why my beard is irreversible at the point. And I guess being portrayed as a master of Mixed Macroeconomic Arts isn’t the worst thing in the world.

One thing, though: It might be worth noting that Benn Steil, after accusing me of cherry-picking data on Iceland and Latvia, apparently never went back to look either at my later work or at the evolving numbers. My early call that Iceland was experiencing a better crisis than anyone else has held up very well:


Indeed, at this point it’s more or less the conventional wisdom.

Yesterday’s second post was “Most of the Way With Obamacare:”

As we wait for King v Burwell – just how far are Republicans on the court willing to destroy the institution’s reputation on behalf of their party? – one question I found myself wondering about was how much of its original goal Obamacare has achieved. We know that the number of uninsured has dropped sharply; we also know that there are still a lot of uninsured. So how are we doing?

There are three issues that, I find, most reporting on the program’s progress tend to ignore. The first is that the ACA was never intended to cover everyone – undocumented immigrants aren’t eligible, yet account for several percent of the population. Second, because signup isn’t automatic, there will always be some leakage, some eligible people who fall through the cracks. Finally, of course, a large number of states are refusing to expand Medicaid and in general trying to obstruct the law.

So it seems to me that to evaluate the program we should (a) look at states that have implemented the law as it was intended to work and (b) compare with a realistic benchmark. For the latter, I’d suggest Massachusetts, where Romneycare has been in operation for almost a decade – and which still has 5 percent of adults age 18-64 uninsured, probably about half undocumented immigrants and half eligible residents falling through the cracks.

How is Obamacare doing relative to that benchmark in its second year of operation? The answer is, pretty well. In Medicare expansion states, it’s already around 80 percent of the way there:

And notice that this been achieved while the deficit has been shrinking and we’ve been having the best job growth since the 1990s. Folks, this program works; not perfectly, but every single claim by its opponents — it won’t reduce the number of uninsured, it will cause soaring rates, it will explode the deficit, it will kill jobs — has been proved false.

The last post yesterday was “The Persistence of ACA Denialism:”

I guess people with strong political preferences have always had a hard time accepting facts that are at odds with those prejudices; but I do also think that it has gotten worse in modern America thanks to the closed information loop of movement conservatism and the incestuous amplification it brings. You see it in things like the rise of inflation trutherism; you also see it in the inability of many on the right to accept the reality that Obamacare really has covered a lot of previously uninsured Americans.

Anyway, the latest line I’ve been hearing is that the decline in uninsurance isn’t really about the ACA, it’s just the improving economy. Now, the same people who say such things tend to deny that the economy is really improving, too — Obamacare was supposed to be a job killer, so it must be killing jobs. But never mind. What about claims that the improving economy is the real story?

The answer is in two parts. First, the decline in the number of uninsured is too steep, too perfectly timed with the coming of the ACA to make sense in such terms. Uninsurance was rising until late 2013, despite a recovering economy, then suddenly fell off a cliff just as the ACA went into full effect. Not a coincidence.

Second, we are now at a point where a much smaller fraction of Americans are uninsured than we’ve seen in a long time, maybe ever. Even in 2000, with unemployment very low and health costs relatively moderate, Census data show that around 16 percent of Americans aged 18 to 64 were uninsured; meanwhile, the HRMS data, which are consistent with multiple other sources, show uninsurance among that group at about 10 percent, and just 7.5 percent in Medicaid expansion states.

I know this program was supposed to be a dismal failure. But, you know, it isn’t.

Krugman’s blog, 6/23/15

June 24, 2015

There were three posts yesterday.  The first was “More on Slavery’s Shadow:”

Harvard’s Maya Sen points me to a recent paper with Avidit Acharya and Matthew Blackwell, The Political Legacy of American Slavery. They show a strong relationship, at the county level, between the slave share of the population in 1860 and political attitudes today:

We show that contemporary differences in political attitudes across counties in the American South in part trace their origins to slavery’s prevalence more than 150 years ago. Whites who currently live in Southern counties that had high shares of slaves in 1860 are more likely to identify as a Republican, oppose affirmative action, and express racial resentment and colder feelings toward blacks.

Remarkably, the slave share in 1860 is a better predictor of attitudes than the share of African-Americans in the population today. They attribute this surprising fact to what happened after the Civil War, when

Southern whites faced political and economic incentives to reinforce existing racist norms and institutions to maintain control over the newly free African-American population.

It seems relevant, then, to note that the “Confederate” flag we’re now focusing on was not, in fact, the flag of the Confederacy; it was a battle flag, but it became a standard emblem of the South thanks to its adoption by the Ku Klux Klan and other white supremacists.

The second post yesterday was “Talking Britain:”

OK, I somehow missed this, but here’s the panel Martin Wolf, David Hendry, and yours truly did about Britain today. Martin is tougher and harsher than I am!

Yesterday’s last post was “Cowboys, Aliens, and Stimulus:”

Some years ago I facetiously suggested that we should invent a fake threat from space aliens as a way to break the destructive obsession with deficits and get the fiscal stimulus the economy needed. (It was actually an episode of The Outer Limits, not The Twilight Zone.) My suggestion was not followed up.

But something along the same lines is now going on in Texas. Texas is, of course, a Medicaid-rejection state, unwilling to accept billions of federal dollars to help its less fortunate. But money for a largely pointless border-protection project? Now you’re talking:

In Rio Grande City, named for the river that splits the U.S. from Mexico, footpaths cut from the brush by drug-smugglers and illegal immigrants have a new look, rehabbed into family-friendly hike-and-bike trails.

Now that the state has authorized $800 million to ratchet up security on the Mexico line, more troopers are on their way to deliver another shot to what might be the biggest stimulus program this needy part of Texas has ever seen.

It really is Keynes and burying bottles in coal mines: spending that actually helps people is unacceptable, but pure waste is OK.

Krugman’s blog, 6/22/15

June 23, 2015

There was one post yesterday, “2013 And All That:”

Those who can, cite evidence to support their position; those who cannot play gotcha. Events have overwhelmingly supported a Keynesian view of the effects of fiscal policy, but the anti-Keynesians have responded, not by reconsidering their views, but by seeking to discredit the messengers. In particular, there’s a lot of “Krugman said X would happen, and it didn’t, so Keynesian economics is wrong.” And in particular particular, the experience of 2013 – when British growth accelerated, and US growth continued despite the budget sequester, is claimed as some sort of decisive experiment.

I’ve already written about the British story – short version: the Cameron government more or less paused in its austerity drive, putting a hold on further tightening. But what about the US story?

Keynesians certainly did argue that the sequester would be a drag on the US recovery, and the economy did in fact continue to recover despite this drag. But in considering the events of 2013 you need to bear in mind two important things.

First, in Keynesian models the economy’s rate of growth depends, other things equal, on the change in fiscal policy. The sequester certainly imposed fiscal tightening; but was it more or less than the fiscal tightening that took place over the previous couple of years, as the ARRA faded out and state governments continued to retrench?

Second, even in 2013, and even on the fiscal front, the sequester wasn’t the only thing going on.

What we should have realized, but I didn’t – at least not fully – was that the sequester just wasn’t that big relative to the economy. TheCBO put the first-year impact on the deficit at $68 billion, or 0.4 percent of GDP, in the first year with much smaller additional impacts thereafter – not trivial, but not huge either.

And the sequester did have a real, visible effect on federal spending – particularly federal consumption. Here’s the annual change in that expenditure:

But this impact was, as I said, not that big relative to the economy, and there were other things going on – such as a sharp slowdown in the rate of fiscal tightening at the state and local level:

So what happened overall? Well, here’s the IMF measure of the cyclically adjusted primary surplus for government as a whole – measured not in levels but in changes from the previous year, which is what should matter for the growth rate:

According to the IMF’s estimates (which are similar to other estimates), there was indeed fiscal tightening in 2013 – but the pace of that tightening was no faster than it had been in 2012 or 2011. So there is no reason we should have seen a sharp growth slowdown, and the fact that growth persisted is in no sense a refutation of Keynesian economics.

I know what the response will be: “But you said blah blah blah!” So what? Even if I did, and even if my remarks aren’t being taken out of context, I am not the Oracle of Keynes, and my fallibility says nothing about how the economy works. If gotcha is all you’ve got, then you’ve got nothing.

Krugman’s blog, 6/20 and 6/21/15

June 22, 2015

There were three posts on Saturday, and two yesterday.  The first post on Saturday was “Obamacare and Labor Supply:”

I was critical of CBO yesterday — probably excessively — for giving what seemed like undue cover for deficit scolds in its long-run budget projection. So credit where credit is due: the new report on the consequences of repealing the ACA is definitely not what the Congressional majority wants to hear. Despite including “dynamic scoring”, the report finds, unambiguously, that Obamacare reduces the deficit and repealing it would enlarge the deficit.

Is there anything in the report that provides fodder for the opponents? I see that the Times report says that there are “mixed effects”, because CBO says that GDP would be higher if the ACA were repealed. And maybe the usual suspects will try to spin it that way.

But the truth is that this report is much, much closer to what supporters of reform have said than it is to the scare stories of the critics — no death spirals, no job-killing, major gains in coverage at relatively low cost.

And there’s another important point: while the ACA may lead to somewhat lower GDP because it reduces labor supply, this does not imply a one-for-one loss in welfare. Suppose that a family’s second earner, now assured of being able to get health insurance, chooses as a result to work shorter hours and spend more time taking care of the children. GDP goes down — but there is a compensating non-monetary gain.

In fact, in a perfectly competitive economy the gain would fully offset the fall in GDP: if workers are paid their marginal product, the fall in GDP from the ACA is equal to the lost wages, but workers choosing to work less clearly prefer to have the extra time to the extra wages. Or to put it a bit differently, other things equal it’s agood thing if workers, freed from the fear that they won’t be able to get health insurance, respond by voluntarily working less.

OK, the story is made more complicated by taxes, which place a wedge between wages paid and income received; so there probably is a net cost to a fall in labor supply. But this effect is fully captured by the loss in revenue, which CBO doesn’t think would be large.

So overall this isn’t at all a “mixed” report — it’s a very big win for Obamacare supporters.

Saturday’s second post was “Voters Always Want a Strong Currency:”

Even as the prospect of Grexit moves from inconceivable to plausible, polls consistently show that Greek voters want to stay on the euro. But what does this tell us?

Not very much, I think — because I’m pretty sure that voters consistently want their currency to be strong. The advantages seem obvious, and there’s also an element of national pride; meanwhile, the difficulties created by an overvalued currency are obscure except to those directly engaged in exporting.

That’s an impressionistic view, but are there data? Well, searchingiPoll doesn’t turn up very much, but here’s an interesting result from 1985, when the U.S. dollar was very strong — so strong that the G5 famously met at the Plaza Hotel to agree on a plan to push it down:

So if Greek voters oppose the idea of a new drachma that would surely be weak against the euro, they are just echoing the preferences of voters always and everywhere.

Now, that consistent preference may itself matter, just as the eternal popularity of the household metaphor for fiscal policy — voters always favor a balanced budget — is one reason Keynesian economics is so hard to apply. But I don’t think there’s much news in Greek sentiment in favor of keeping the euro.

The last post on Saturday was “The Issue That Won’t Go Away:”

So another atrocity has us talking about race again. And rightly so. Nothing about America makes sense without understanding the long shadow cast by the original sin of slavery.

And yes, it’s an integral part of the left-right divide. Look at “Why Doesn’t the United States Have a European-Style Welfare State?” by Alberto Alesina — yes, that Alesina — Ed Glaeser, and Bruce Sacerdote. The authors are hardly big lefties; nonetheless, they were driven to the conclusion that it’s mainly about you-know-what:

Racial discord plays a critical role in determining beliefs about the poor. Since racial minorities are highly overrepresented among the poorest Americans, any income-based redistribution measures will redistribute disproportionately to these minorities. Opponents of redistribution in the United States have regularly used race-based rhetoric to resist left-wing policies. Across countries, racial fragmentation is a powerful predictor of redistribution. Within the United States, race is the single most important predictor of support for welfare. America’s troubled race relations are clearly a major reason for the absence of an American welfare state.

To see what they’re talking about, and why their point remains so relevant, look at two maps. First, the implementation of the Affordable Care Act:

Second, this:

The first post yesterday was “Avoiding Apocalypse:”

Larry Summers has written a scary column warning that Greece may be on the verge of becoming a “failed state”. It’s a useful corrective to the extraordinary complacency I’m hearing from too many European officials. But I do think it’s worth pointing out that this need not happen, even if there is no deal.

What Summers seems to portray is a scenario in which Greek banks collapse and take down the economy with them. But what if Greece abandons the euro and issues its own currency to keep cash flowing?

For sure there would be a sharp devaluation, which would lead to a spike in inflation. But would hyperinflation follow? Remember that Greece is running a large cyclically adjusted primary surplus — that is, given even a modest economic recovery it would not need to roll the printing presses to pay its bills. And a a devaluation would, other things equal, promote recovery.

I know that many people are telling stories about immediate collapse due to inability to buy raw materials, complete failure of exports to respond, and so on. They could be right. But I actually can’t think of any historical examples that fit this story — in particular, all the hyperinflations I know about involved governments too weak to collect taxes, and believe it or not, that’s not true of Greece despite all you’ve heard.

So even if Greece goes over the edge in the next few days, there may be another off-ramp from the road to hell. And at that point the European problem would turn on its axis, as Wolfgang Munchau says, and become one of coping with the euro’s evident reversibility.

Yesterday’s second post was “No Shaving Grace:”

Serious matters are afoot, but I don’t know if there’s anything more I can say about them right now. So, on to a subject where I think I can make a useful intervention: Peter Dorman’s query about why so many economists wear beards.

Actually, others have asked the same question — and found that bearded Nobelists are not quite as prevalent as one might have thought. Mostly, I think, it’s the impression conveyed by myself and Joe Stiglitz, although Simon Wren-Lewis has an even more impressive display.

But to the extent that there is a pattern here, it’s basically about the whiz-kid culture of economics, in which careers can take off very quickly — and one’s appearance may not have kept up with one’s professional reputation. I grew my beard when I was 26, and it was very definitely a defensive move: there I was, writing what I hoped were ground-breaking papers — everything everyone has said about international trade is wrong! — and looking like an undergraduate. (Seriously — when I went in to see a colleague some of the students complained that I was cutting ahead of the line). So I was looking for a bit of hairy gravitas.

And by the time I no longer needed that, the beard had become part of my persona.

Krugman’s blog, 6/19/15

June 20, 2015

There were three posts yesterday.  The first was “Does Greece Need More Austerity?”:

As many of us have noted, it’s hugely unfair when people claim that Greece has done nothing to adjust. On the contrary, it has imposed incredibly harsh austerity and substantial reforms on other fronts. Yet you might be tempted to argue that the results show that Greece hasn’t done enough — after all, last year it was running only a tiny primary budget surplus (that is, not counting interest), and this year it has slipped back into primary deficit. So more adjustment is needed, right?

Well, step back for a minute and imagine that we weren’t talking about Greece but about the U.S. or the UK. When we look at our budgets, we normally focus not on the headline budget balance but on the cyclically adjusted balance — an estimate of what it would be at more or less full employment. This helps avoid pressure to pursue procyclical policies that make the economy unstable, and also gives a better idea of the long-run sustainability of the position. And while cyclical adjustment can be controversial, there are standard estimates from third parties like the IMF and the OECD.

So here’s a picture you probably haven’t seen: the IMF’s estimatesof the cyclically adjusted primary balances of eurozone countries in 2014:

Greece is, by this measure, the most fiscally responsible, indeed crazily austere, nation in Europe.

So why is it in fiscal crisis? Because the economy is deeply depressed.

Suppose that there were a way to end this depression. Then Greece’s fiscal problems would melt away, with no need for further cuts. But is there any way to do that?

The answer is, not as long as Greece remains in the euro. It can pursue reforms that might make it more competitive, but anyone promising dramatic, quick results has no idea what he is talking about.

On the other hand, Grexit would produce a rapid improvement in competitiveness, at the cost of possible financial chaos.This is not a route anyone has been willing to go down, but one does have to say that as the crisis worsens it becomes a more plausible outcome.

The thing to understand, in any case, is that if Grexit does come, fiscal issues will immediately cease to be central to the story. Instead, it will all be about handling bank panic, managing the transition to a new currency, and possibly removing structural obstacles to increased exports (which would very much include tourism).

In truth, this has never been a fiscal crisis at its root; it has always been a balance of payments crisis that manifests itself in part in budget problems, which have then been pushed onto the center of the stage by ideology.

Yesterday’s second post was “The Politicization of CBO Begins:”

Update: Richard Kogan has contacted me to say that while the claim of a worsening budget situation is made at the beginning of the report, the analysis that follows is in fact clean and careful. So we’re talking about a misleading statement rather than a misleading analysis. And sources close to CBO insist that the misleading statement was careless drafting rather than deliberate politicization. OK, I guess.

But this is not a place to be careless. My inbox filled up this morning with deficit scold cries of triumph — who knew that Fix the Debt was still out there? — saying, “see, CBO confirms that the deficit is spinning out of control”.That’s why I guessed that we were seeing political influence. If not, good — but in this charged environment, you have to be very, very careful.

What with everything else going on, a seemingly technical note from Richard Kogan at the Center on Budget and Policy Priorities may be slipping under the radar. But this is really important.

As Kogan notes, the Congressional Budget Office has released its latest set of long-run budget projections, declaring that “The long-term outlook for the federal budget has worsened dramatically over the past several years.” And this is quite scary — not the projections, but the fact that CBO would say this. Because as Kogan points out, the budget office’s own numbers contradict its claims.

The key point is that CBO makes what Kogan rightly calls an apples-to-oranges comparison, comparing pre-2010 current-law estimates that assumed that the Bush tax cuts would expire in full with later projections that incorporate their partial extension (as well as a related issue involving the Alternative Minimum Tax.) This doesn’t mark a real deterioration in the outlook, and it certainly doesn’t indicate out of control policy. In fact, the outlook isn’t particularly scary.

Oh, and as Kogan noted in another paper, CBO’s estimates are almost surely too pessimistic on interest rates, so that the long-run budget outlook is even less scary than it appears.

So what’s going on here? I can’t believe that CBO staff were confused about these issues. What it looks like, I’m sorry to say, is the first indication that the new, GOP-dominated CBO is in fact going to be politicized, engaging in deficit scare tactics when that suits the majority, pro-tax-cut scoring, and more.

The last post yesterday was “Two Centuries of Taylor Swift:”

I did an interview with Billboard on the economics of music; I’m not a real expert here, I just played one at SXSW, but I had some fun (and it is something I care about!)

Krugman’s blog, 6/18/15

June 19, 2015

There was one post yesterday, “Thinking About the All Too Thinkable:”

The path toward non-Grexit — toward Greece and its creditors reaching a deal that keeps it in the euro — is getting narrower, although it’s not yet completely closed. I’ve been reticent on the subject, for fear of adding my bit to the crisis atmosphere, and I still intend to keep it cool. But there are a few things that seem to need saying.

First, the first line of defense against euro exit has been overrun. Way back when Barry Eichengreen made an argument many of us found persuasive, namely that no country would dare even hint at leaving the euro because such a move would trigger “the mother of all financial crises” as everyone raced to pull funds out of banks. Assome of us noted, however, this would become moot if the financial crisis and bank runs happened in advance, Argentine style, forcing the imposition of capital controls and other measures.

As it turned out, the Argentine scenario was headed off by the political determination of elites to stay in the euro and the success of the ECB’s “whatever it takes” declaration of willingness to act as lender of last resort. But the reprieve wasn’t permanent; in this respect, at least, Athens 2015 is Buenos Aires 2001. Financial stability is already greatly compromised, so the costs of thinking about the formerly unthinkable have fallen.

How did we get to this point? Nothing fills me with quite as much despair as the persistence of the story line that it’s all about continuing Greek fecklessness, that the Greeks haven’t done anything. In fact, Greece has imposed almost inconceivable pain on itself. Here’s a comparison between Greece and Spain, the current favorite son of the austerity camp (although the Spaniards themselves aren’t impressed):

European Commission

The problem has been that severe spending cuts in an economy with no independent monetary policy and no ability to devalue lead to severe economic contraction, which in turn means that a large part of what’s gained fiscally at the front end gets lost via reduced revenue. This isn’t the fault of the Greeks, it’s basically a design flaw in the euro itself.

So what about Grexit? At this point quite a few people on the creditor/Troika side of the negotiations seem almost to welcome the prospect. But this is bizarre in terms of their underlying interests. Yes, the lives of the officials would become easier, for a while, because they wouldn’t have to deal with Syriza. But from the point of view of the creditors, Grexit would be a pure negative. They would almost surely receive less in payments than they would under any deal that keeps Greece in, and the proof that the euro is in fact reversible would grease the rails for future crises, even if the ECB is able to contain this one.

And as Martin Wolf points out, Greece will still be there, and will still need dealing with.

The Greeks, on the other hand, should feel conflicted. There would probably be a lot of financial chaos in the immediate aftermath of euro exit. And maybe the apocalyptic warning from the Bank of Greece that devaluation would push the nation back into the Third World is right, although I’d like to know about the model and historical examples that would justify this claim. But absent that kind of implosion, a devalued currency should eventually produce an export-led recovery — I understand the cynicism one hears, but demand curves do slope downwards even in Greece.

The point is that nobody should be casual or confident here. But the creditors should actually be even more worried than the Greeks about a potential exit that has no upside for the rest of Europe.

Krugman’s blog, 6/17/15

June 18, 2015

There was one post yesterday, “TPP Versus NAFTA:”

Many people — myself included — thought that TPP would, in the end, follow the model of NAFTA: a Democratic president would push the agreement through Congress, but the bulk of the votes would be Republican. But it doesn’t seem to be going that way. Why?

Lydia DePillis suggests that procedural differences and the changed political environment are what changed. Maybe. But I’d suggest three additional factors.

First, while non-trade issues like dispute settlement and intellectual property already loomed large in NAFTA, it was nonetheless more of a genuine trade agreement than TPP — it was, or was perceived as by all sides, to an important degree about the integration of Mexican manufacturing into a North American industrial complex. This meant that conventional trade analysis seemed much more relevant than it does in the current dispute, where economists who try to lecture us about comparative advantage end up looking ridiculously out of touch.

Despite this, the real case for NAFTA involved foreign policy — which is also true for TPP (administration officials tell me that it’s really about geopolitics.) But that case was much more compelling for NAFTA, which was about rewarding Mexican reformers. In 1993, the risk that rejecting NAFTA would provoke an anti-US backlash and empower radicals seemed real and concrete. By contrast, geopolitical arguments for TPP are vague and nonspecific, involving prestige and influence and supposed Asian perceptions. Maybe so, but hard to sell (and why should we trust such claims?)

Finally, I think it’s fair to say that the liberal intelligentsia has been somewhat radicalized by Republican extremism; making common cause with those who share your basic values matters more than it seemed to a couple of decades ago. (And they wonder why the White House doesn’t see this.) Yes, I’m partly talking about myself, but it’s much broader than that; even Larry Summers is at best praising TPP with faint damns, so that most of his recent columns read more like a brief against the agreement than one in support.

So it really is a different game, and TPP supporters need to realize that old rules no longer apply.


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