Paul Krugman on longterm 3% growth

The Trump Administration and the Congressional Republicans have been promising that their magic tax cut will produce 3% growth over an extended period. That was part of the official assumption to minimize the projected deficit the tax cut produces.

Krugman explains why that is unlikely, to put it mildly (What the Economic Data Don’t Tell Us New York Times 01/28/2018). It involves an economics theory known as Okun's Law:

Potential output – the economy’s productive capacity – grows fairly smoothly. But recessions leave some of that capacity idle, and the economy can temporarily grow fast as that capacity is put back to use. The unemployment rate is an imperfect measure of idle capacity; still, there’s a strong relationship – Okun’s Law – between changes in the unemployment rate – capacity going into or out of use – and short-run economic growth

The unemployment rate is currently at a low point. Looking at the variable rates of quarterly growth and how 2017 fits into the Okun's Law trend, he concludes that a longterm 1.5% rate is far more realistic:

Why is potential growth so low? Unfavorable demographics are one big culprit: the baby-boomers are getting old (you kids get off my lawn), so the working-age population is barely growing. Oh, and cracking down on immigration is, you know, not likely to help on that front.

Productivity growth is also lackluster, despite all the hype about robots and all that. [my emphasis]

There is a lot more to say about unemployment and the constraints on labor participation rates, of course. But Krugman is giving a brief explanation about why the longterm 3% growth rate the Republicans are projecting/fantasizing is not a realistic expectation.

Some pragmatic commentary from Paul Krugman on tax reform

Paul Krugman provides the following tweetstorm analysis of the 1986 tax reform in the US:

Everyone holds up the 1986 tax reform as a model of seriousness -- which it was. But no discernible impact on growth! 1/ pic.twitter.com/x8PcKr4jzU

— Paul Krugman (@paulkrugman) October 22, 2017

So why do we talk so much about taxes? Because so many politicians and others are well paid to make a big deal of the subject 3/

— Paul Krugman (@paulkrugman) October 22, 2017

This isn't cynicism, just realism. Anyone who imagines that the politics of taxes reflects hard thinking is living in a fantasy world 5/

— Paul Krugman (@paulkrugman) October 22, 2017

Gimme that old time Bipartisanship

A Bipartisanship flashback from Paul Krugman: Stimulus arithmetic (wonkish but important) New York Times 01/06/2009.

Krugman has always been critical of President Obama's adventures in bipartisanship. Which is why I've been surprised by his enthusiastic support for Hillary Clinton in the Democratic primaries this year, which he pressed with the all-too-common scorn of Hillary supporters for Bernie Sanders.

This column is from January 9, 2009, before Obama's inauguration. Obama was already telegraphing something like the initial stimulus plan which was pretty much along the same lines of this one. Krugman has always criticized that stimulus as being about half the size that was need to quickly return the economy to something like a pre-crisis condition. Since Europe was even more caught up in austerity madness, it makes a good comparison with Merkel-nomics in retrospect. But it was not as big as it should have been.

And the Bipartisanship of the deal worked out about like Krugman expected:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then [Republican Senator] Mitch McConnell says "See, government spending doesn’t work.”

Krugman explained his economic reasoning at the time in that column.

I certainly hope we're not looking at four years of Donald Trump. But I also worry that with Hillary in the White House, we'll be facing four more years of similar "bipartisan" dancing. With similar results.

Krugman vs. Bernie

Paul Krugman has had lots of praise for Hillary Clinton during the primary contest and criticism of Bernie Sanders.

He joins the Clinton camp's current griping about Bernie actually campaigning for the Presidential nomination (Sanders Over the Edge New York Times 04/08/2016). Bernie's "political theory of change, his waving away of limits, seemed utterly unrealistic."

I don't know what that means except that Bernie would have to fight to get his proposals through Congress. And he's talking about building support for that through things like mobilizing supporters for high turnout in November (which Obama actually achieved in 2008); reviving a 50-state strategy to make the Democrats competitive in all Congressional districts (which Howard Dean started as Democratic National Committee chair got started and Obama discontinued); and, proposing what he really wants and fighting for it. The only way Hillary's "political theory of change" differs from that as far as I can see is that she probably won't put the emphasis Bernie would on boosting turnout, she's not especially interested in a fifty-state strategy (because if you're A Democrat whose preferences lean conservative it's an advantage for the Democrats not to be competitive in many Republican-held Congressional districts), and she won't propose the same kind of far-reaching reforms Bernie will.

And the Republican can be expected to continue their attempts at mass obstruction with either Bernie or Hillary as President.

Krugman even says, "Bernie is becoming a Bernie Bro." Krugman, who introduced the useful image of the Confidence Fairy to economic conversation, should know better that to evoke such a (mostly) mythical creatures as the "Bernie Bro." And he concludes the column with this dismissive comment along the lines of what the Clinton camp is promoting at the moment, "The Sanders campaign has brought out a lot of idealism and energy that the progressive movement needs. It has also, however, brought out a streak of petulant self-righteousness among some supporters. Has it brought out that streak in the candidate, too?"

Robert Reich posted this six-point response to Krugman's column today (04/08/2016) on his Facebook page, including addressing bank reform (I've slightly reformatted the text):

Ordinarily I wouldn’t pick on a particular columnist but I respect Paul Krugman. Also, his perch at the New York Times gives him broad influence – especially just two weeks before the important New York State primary. But his piece today (which I’ve attached) is shot through with errors.

1. 1. The biggest Wall Street banks did indeed precipitate the crisis on Wall Street in 2008 because of their gambling in newfangled financial instruments and fancy derivatives even they didn't understand.
2. 2. Their size did make a difference because they were so interconnected with other financial entities both in the U.S. and around the world that they were "too big to fail." Today's biggest Wall Street banks are much bigger than they were in 2008.
3. 3. Size also has a bearing on their political influence. The reason the Glass-Steagall Act was scotched by Bill Clinton's administration, and the Clinton administration wouldn't agree with the CFTC to regulate derivatives, had a lot to do with the influence of Wall Street over the Clinton administration and over Congress. The political power of the biggest players on the Street is even larger today – as evidenced by their capacity to whittle back significant parts of Dodd-Frank in the regulatory process.
4. 4. Breaking up the biggest banks isn’t a radical idea. In fact, many experts – including the current president of the Federal Reserve Bank of Minneapolis (who’s a Republican and a former executive of Goldman Sachs), and the former head of the Federal Reserve Bank of Dallas -- have called for exactly this.
5. 5. Bernie's other ideas -- for a single-payer plan, and for free tuition at public institutions of higher education – are sensible, and also backed by many experts. It’s well-established that a single-payer plan would be far less costly and deliver far better care than our own system, which is based on private for-profit insurers. As to free tuition in public universities, we were well on the way to this goal in the 1950s and 1960s. It was and is a logical extension of free K-12 education.
6. 6. Finally, the current brouhaha over who's "qualified to be president" was arguably started by Hillary Clinton. Personally, I think neither she nor Bernie should be calling the other unqualified, but to blame Bernie for this exchange is simply incorrect.

Thge Young Turks have been giving careful attention to New York Daily News interview that Clinton took advantage of the last few days.

New York Daily News Tries Hatchet Job On Bernie, Fails 04/06/2016:





The Four Layers Of Gotcha Questions 04/06/2016:





NY Daily News: Scary Bernie Hates Israel! 04/07/2016:





Charlie Pierce thinks both Hillary and Bernie handled this in a sub-optimum way. (Reading Between the Lines of Hillary and Bernie's Big Media Battle Esquire Politics Blog 04/07/2016) He uncharacteristically finds himself in the Mugmump position for this particular case:

I'm starting to wonder seriously about both of these people. Neither campaign seems able to avoid the easiest mistakes in optics. Neither one seems to grasp the appetite of the elite political media for a Democratic hooley to correspond to the ongoing one in the Republican Party, because that will allow for the Both Sides In Turmoil narrative that will allow the elite political media to ignore the fact that the top two contenders for the Republican nomination are an ego-driven vulgar talking yam, and an extremist theocrat who believes himself to be blessed by the Almighty to redeem this sinful land. When your opponent is drowning, you throw him the anchor. You don't cling to it yourself. Yeesh.

Stiglitz on the massive need for Keynesian stimulus policies

"The obstacles the global economy faces are not rooted in economics, but in politics and ideology." - Joseph Stiglitz, 2016

He makes this case in the form of a sensibly Keynesian diagnosis of the state of the world economy in The Great Malaise Continues Project Syndicate 01/03/2015.

The politics in much of the West have been in hock to the gospel of neoliberalism (aka, free-market fundamentalism, Herbert Hoover economics, Angela Merkel economics) for so long now that bonehead textbook Keynesian economics sounds dangerously radical. But however one chooses to position it on the current political spectrum, Keynesian economic analysis address the kinds of problems many economies currently have and offer useful solutions. Not least among them is the need to flush what Stiglitz calls "deficit fetishism." That's why Keynesians like Paul Krugman, who tend to call themselves New Keynesians these days, and Post-Keynesians like Jamie Galbraith and Yanis Varoufakis find a lot to agree on in terms of immediate policy needs right now.

Krugman gives us a hint of what some of the difference would emerge in his post, Presidents and the Economy 12/30/2015:

After I put up my post comparing private-sector jobs under Obama and Bush, a number of people asked me whether I believe that presidents have a large effect on economic performance. My answer is no — but conservatives believe that they do, which is why this kind of comparison is useful.

To expand on my own views, in normal times the economy’s macroeconomic performance mainly depends on monetary policy, which isn’t under White House control. Now, we’ve been in a liquidity trap for the whole Obama administration so far, giving fiscal policy a much more central role — and the initial stimulus did help quite a lot. Since 2010, however, fiscal policy has been paralyzed by GOP obstruction, so we’re back to a situation where the WH has little influence. [my emphasis in bold]

The last book of John Kenneth Galbraith's (1908-2006) published during his lifetime was The Economics of Innocent Fraud (2004). He devotes one of the chapters in this short book to what he calls "our most prestigious form of fraud, our most elegant escape from reality." That, he explains, is that, "Quiet measures enforced by the Federal Reserve are thought to be the best approved, best accepted of economic actions. They are also manifestly ineffective. They do not accomplish what they are presumed to accomplish. ... Here is our most cherished and, on examination, most evident form of fraud."

This is a major difference between New Keynesian and Post-Keynesian economics. The former have faith in the effectiveness of monetary policy, the latter have little or none. I assume that some in the post-Keynesian camp don't go quite as far as Galbraith senior did in dissing monetary policy. However, when it comes to addressing a recession or depression - specifically in economist-speak when the interest rate is at the lower bound, i.e., near zero - New Keynesians and Post-Keynesians alike recognize that monetary policy isn't much use in restoring growth. And not just monetarists, who have declined tremendously in their number of adherents since the 1970s, but the other various forms of conservative/neoliberal economic theories are still devoted to the notion of the Fed's magical monetary powers. As are many investment advisers and people who try to follow the stock market closely on their own with no specialized training.

But getting back to Stiglitz, he's right on the mark here:

Former US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering from a “savings glut.” That might have been the case had the best use of the world’s savings been investing in shoddy homes in the Nevada desert. But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing.

The only cure for the world’s malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system – not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs.

... It makes sense for countries like the US and Germany that can borrow at negative real long-term interest rates to borrow to make the investments that are needed. Likewise, in most other countries, rates of return on public investment far exceed the cost of funds. For those countries whose borrowing is constrained, there is a way out, based on the long-established principle of the balanced-budget multiplier: An increase in government spending matched by increased taxes stimulates the economy. Unfortunately, many countries, including France, are engaged in balanced-budget contractions. [emphasis in original]

Theory and just-the-facts

Paul Krugman makes a good point in the field of economics that applies more broadly to the need to give attention to theory in interpreting empirical research. In A Dark Age of Empirical Work 10/22/2013,

... unless you at least try to think in terms of a broader model, all the empirical work in the world can’t answer some questions — and you can all too easily draw the wrong conclusions. Take Chetty's very example, the effects of unemployment insurance. He reports evidence that extended benefits have only a small effect on the time people spend searching for work. But suppose the result went the other way; would that say that UI was hurting employment? Not necessarily, and I’d say not at all: right now the economy is constrained not by a lack of willing workers but by a lack of demand, so that making workers more choosy about accepting jobs would, to a first approximation, have no effect at all on overall employment.

And interpreting the micro results on job search as having a one-to-one impact on the macro outcome is a classic case of implicit theorizing, which is what people who imagine themselves to just be looking at the facts often do.

So yes, there is a dark side to all this data-driven work; data are good, but not if they’re used to dodge the core issues.

Tags: paul krugman

Corporations and "central planning"

Paul Krugman makes a basic point about how corporations and other large firms operate in the real world, a reality often obscured by zombie economic dogma in John Galt and the Theory of the Firm 07/16/2013:

For that matter, why should any large firm exist? Why not just have small firms, or maybe just individuals, who make deals for whatever they need?

Of course, that's not how we do things. We may live in a market sea, but that sea is dotted with many islands that we call firms, some of them quite large, within which decisions are made not via markets but via hierarchy — even, you might say, via central planning. Clearly, there are some things you don’t want to leave up to the market — the market itself is telling us that, by creating those islands of planning and hierarchy. ...

The thing is, however, that for a free-market true believer the recognition that some things are best not left up to markets should be a disturbing notion. If the limitations of markets in providing certain kinds of shared services are important enough to justify the creation of command-and-control entities with hundreds of thousands or even millions of workers, might there not even be some goods and services (*cough* health care *cough*) best provided by non-market means even at the level of the economy as a whole?

He also links to the paper by Oliver Williamson Transaction, Cost Economics: The Natural Progrssion 12/08/2009.

Tags: paul krugman

Stagflation as it really was

Good post by Paul Krugman on The Mythical 70s 05/19/2013. He gives a standard Keynesian definition of the "stagflation" phenomenon of the 1970s:

There was no deficit problem: government debt was low and stable or falling as a share of GDP during the 70s. Rising welfare rolls may have been a big political problem, but a runaway welfare state more broadly just wasn’t an issue — hey, these days right-wingers complaining about a nation of takers tend to use the low-dependency 70s as a baseline.

What we did have was a wage-price spiral: workers demanding large wage increases (those were the days when workers actually could make demands) because they expected lots of inflation, firms raising prices because of rising costs, all exacerbated by big oil shocks. It was mainly a case of self-fulfilling expectations, and the problem was to break the cycle.

So why did we need a terrible recession? Not to pay for our past sins, but simply as a way to cool the action. Someone — I’m pretty sure it was Martin Baily — described the inflation problem as being like what happens when everyone at a football game stands up to see the action better, and the result is that everyone is uncomfortable but nobody actually gets a better view. And the recession was, in effect, stopping the game until everyone was seated again.

He points out that the solution actually adopted - high interest rates imposed by Fed Chairman Paul Volcker which began under President Carter, who appointed him, and the deregulation and (domestic) austerity - didn't have completely admirable results, to put it mildly. "It worked on the inflation front, although some of the other myths about all that are just as false as the myths about the 1970s. No, America didn’t return to vigorous productivity growth — that didn’t happen until the mid-1990s."

Even Krugman is conventional enough to sidestep the Galbraithian option of wage and price controls as a tool to deal with the inflation of that time. Instead, he winds up giving a rather fatalistic picture of the options of the time:

Was there a better way? Ideally, we should have been able to get all the relevant parties in a room and say, look, this inflation has to stop; you workers, reduce your wage demands, you businesses, cancel your price increases, and for our part, we agree to stop printing money so the whole thing is over. That way, you’d get price stability without the recession. And in some small, cohesive countries that is more or less what happened. (Check out the Israeli stabilization of 1985).

But America wasn't like that, and the decision was made to do it the hard, brutal way. This was not a policy triumph! It was, in a way, a confession of despair.

People eagerly interpret the past in light of the present and often do so superficially. But it is important to try to remember what really happened.

Tags: paul krugman, stagflation, us economy

Krugman tells the story of present-day austericide economics

Paul Krugman has a typically insightful account on the story of austerity economics during the current depression in How the Case for Austerity Has Crumbled New York Review of Books 60:10 (06/06/13 edition; accessed 05/15/2013).

This is a key moment in the story:

... where the onset of the Great Depression was accompanied by policies that intensified the slump—interest rate hikes in an attempt to hold on to gold reserves, spending cuts in an attempt to balance budgets—2008 and 2009 were characterized by expansionary monetary and fiscal policies, especially in the United States, where the Federal Reserve not only slashed interest rates, but stepped into the markets to buy everything from commercial paper to long-term government debt, while the Obama administration pushed through an $800 billion program of tax cuts and spending increases. European actions were less dramatic—but on the other hand, Europe’s stronger welfare states arguably reduced the need for deliberate stimulus.

Now, some economists (myself included) warned from the beginning that these monetary and fiscal actions, although welcome, were too small given the severity of the economic shock. Indeed, by the end of 2009 it was clear that although the situation had stabilized, the economic crisis was deeper than policymakers had acknowledged, and likely to prove more persistent than they had imagined. So one might have expected a second round of stimulus to deal with the economic shortfall.

Instead, a faith-based enthusiasm for austerity policies, unhinged from actual evidence that such an approach would be anything but harmful in a depression, took hold in both Europe and the US. As Krugman puts it, "Standard textbook economics says that slashing government spending reduces overall demand, which leads in turn to reduced output and employment." So it's not as though nobody knew this was a bad idea. But the crowd Krugman has labeled the Very Serious People - which is probably going to be a lasting contribution of Krugman's to American English - thought otherwise.

And they found economists who were telling them what they wanted to hear, two significant pairs of whom Krugman discusses in this essay, Alberto Alesina and Silvia Ardagna, and the duo that recently became world-famous for an Excel coding error, Carmen Reinhart and Kenneth Rogoff.

And Herbert Hoover/Heinrich Brüning got an excellent real-world test. Unfortunately for most of those who experienced it. And the support from the economics profession that allegedly supported the policy proved to be built on sand, or had feet of clay, or blew away like stray in the wind, whatever metaphor you prefer:

Three years after the turn to austerity, then, both the hopes and the fears of the austerians appear to have been misplaced. Austerity did not lead to a surge in confidence; deficits did not lead to crisis. But wasn't the austerity movement grounded in serious economic research? Actually, it turned out that it wasn't—the research the austerians cited was deeply flawed.

First to go down was the notion of expansionary austerity. Even before the results of Europe’s austerity experiment were in, the Alesina-Ardagna paper was falling apart under scrutiny. Researchers at the Roosevelt Institute pointed out that none of the alleged examples of austerity leading to expansion of the economy actually took place in the midst of an economic slump; researchers at the IMF found that the Alesina-Ardagna measure of fiscal policy bore little relationship to actual policy changes. "By the middle of 2011," Blyth writes, "empirical and theoretical support for expansionary austerity was slipping away." Slowly, with little fanfare, the whole notion that austerity might actually boost economies slunk off the public stage.

Reinhart-Rogoff lasted longer, even though serious questions about their work were raised early on. As early as July 2010 Josh Bivens and John Irons of the Economic Policy Institute had identified both a clear mistake—a misinterpretation of US data immediately after World War II—and a severe conceptual problem. Reinhart and Rogoff, as they pointed out, offered no evidence that the correlation ran from high debt to low growth rather than the other way around, and other evidence suggested that the latter was more likely. But such criticisms had little impact; for austerians, one might say, Reinhart-Rogoff was a story too good to check.

It is a tribute to the power of stories that austericide economics got such a hearing. But it was more a tribute to the influence of the very wealthy who, for reasons that may in some ways have been partially rational and in other just plain misguided, supported austericide. Krugman puts it this way:

So is the austerian impulse all a matter of psychology? No, there’s also a fair bit of self-interest involved. As many observers have noted, the turn away from fiscal and monetary stimulus can be interpreted, if you like, as giving creditors priority over workers. Inflation and low interest rates are bad for creditors even if they promote job creation; slashing government deficits in the face of mass unemployment may deepen a depression, but it increases the certainty of bondholders that they’ll be repaid in full. I don’t think someone like Trichet was consciously, cynically serving class interests at the expense of overall welfare; but it certainly didn’t hurt that his sense of economic morality dovetailed so perfectly with the priorities of creditors.

It’s also worth noting that while economic policy since the financial crisis looks like a dismal failure by most measures, it hasn't been so bad for the wealthy. Profits have recovered strongly even as unprecedented long-term unemployment persists; stock indices on both sides of the Atlantic have rebounded to pre-crisis highs even as median income languishes. It might be too much to say that those in the top 1 percent actually benefit from a continuing depression, but they certainly aren’t feeling much pain, and that probably has something to do with policymakers’ willingness to stay the austerity course.

I wonder if it's conscious irony on his part that after dismissing the deeply-ingrained habit of looking at economics as a morality play, in his concluding section he uses the language of "sin" to describe the failings of the economics profession around the current depression.

Tags: austerity economics, paul krugman

Rain of error and the rain-dancers

Paul Krugman has been indulging in a polite academic version of "kicking ass and taking names" over austerity policy, aka, "austerianism" and "austericide", in his blog.

Some of the names of people he's been naming who have established a record of consistently getting the economics seriously wrong during this depression include:

• Carmen Reinhart and Kenneth Rogoff (of course!) (Holy Coding Error, Batman 04/16/2013; Reinhart-Rogoff, Continued 04/16/2013; Correlation, Causality, and Casuistry 04/18/2013; Lack Of Nuance Is Not The Problem 04/19/2013; Grasping at Straw Men 04/26/2013; More Straw 05/02/2013; Varieties of Academic Temptation 05/03/2013)
• Paul Ryan (OF COURSE!, ad Cenk Uygur might say)
• Alberto Alesina (Night of the Living Alesina 03/13/2013) and Silvia Ardagna (Alesina On Stimulus 02/06/2013)
• Anders Aslund and Olli Rehn Very Sensitive People 04/22/2013
• Peter Coy, Other Austerity Bloopers 04/20/2013
• The Cato Institute (The Gods Themselves Contend In Vain 05/04/2013, first linked article)
• Clive Crook (Not Everything Is Political 05/01/2013)
• Mario Draghi (Playing Whack-a-Mole With Expansionary Austerity 05/03/2013)
• Stanley Druckenmiller and Paul Singer (More on the Roots of Bernanke Hatred 05/09/2013)
• Ken Langone (The Ignoramus Strategy 04/27/2013)
• Allan Meltzer, Robert Samuelson, and Lorenzo Bini Smaghi (Building A Mystery 04/22/2013; Trap Denial 04/23/2013; ; Not Enough Inflation New York Times 05/02/2013)
• Alan Reynolds (Speaking of Getting It Wrong 05/01/2013; Not Enough Inflation New York Times 05/02/2013)

In this post, he points to the intellectual and practical bankruptcy of the austericide position, and discusses some major currents of economic theory that actually have something substantial to contribute to policy discussions right now:

There have, however, been a couple of side shows, with what I guess now constitutes mainstream Keynesianism – carried forth in public debate by Martin Wolf, Simon Wren-Lewis, Brad DeLong, Jonathan Portes, Paul DeGrauwe, and whatshisface [Krumgan himself], among others – subjected to non-austerian criticism on both flanks. On the left are the Modern Monetary Theory types, who assert exactly what the austerians like to claim, falsely, is the Keynesian position – that budget deficits never matter (except for their direct effect on aggregate demand). On the right are the market monetarists like Scott Sumner and David Beckworth, who insist that the Fed could solve the slump if it wanted to, and that fiscal policy is irrelevant.

Now, there won't and can’t be any current-events test of MMT until we get out of the slump, because standard IS-LM [Keynesianism] and MMT are indistinguishable when you’re in a liquidity trap. But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.

And the results aren’t looking good for the monetarists: despite the Fed's fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll. I would add that the UK experience provides a similar lesson. Mervyn King advocated fiscal consolidation – I’d say that he shares equal responsibility with Cameron/Osborne for Britain’s wrong turn — but more or less promised (pdf) that he would and could offset any adverse effects on growth with monetary policy. He didn't and couldn't. [my emphasis]

See also Krugman's column The 1 Percent's Solution New York Times 04/25/2013.

Henry Blodget in The Economic Argument Is Over — Paul Krugman Has Won Business Insider 04/24/2013 explains how Krugman's Keynesian perspective has proven itself the empty austericide arguments:

This debate has not just been academic. It has affected the global economy, and, with it, the jobs and livelihoods of hundreds of millions of people.

Those in favor of economic stimulus won a brief victory in the depths of the financial crisis, with countries like the U.S. implementing stimulus packages. But the so-called "Austerians" fought back. And in the past several years, government policies in Europe and the U.S. have been shaped by the belief that governments had to cut spending or risk collapsing under the weight of staggering debts.

Over the course of this debate, evidence has gradually piled up that, however well-intentioned they might be, the "Austerians" were wrong. Japan, for example, has continued to increase its debt-to-GDP ratio well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low. More notably, in Europe, countries that embraced (or were forced to adopt) austerity, like the U.K. and Greece, have endured multiple recessions (and, in the case of Greece, a depression). Moreover, because smaller economies produced less tax revenue, the countries' deficits also remained strikingly high.

Tags: austerity economics, paul krugman

Inequality and education - and how Cold War thinking may have messed up understanding them

Paul Krugman in Rise of the Robots 12/08/25012 looks at evidence showing a huge shift of income in the US from labor to capital and explains why his own perspective in the 1990s didn't put a high priority on this. And part of the reason, he suspects, is that bringing it up might have sounded too much like "old-fashioned Marxism."

What has happened [over the last three decades], on the other hand, is a notable shift in income away from labor ...

If this is the wave of the future, it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won't do much to reduce inequality if the big rewards simply go to those with the most assets. Creating an "opportunity society", or whatever it is the likes of Paul Ryan etc. are selling this week, won't do much if the most important asset you can have in life is, well, lots of assets inherited from your parents. And so on.

I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn't seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism — which shouldn't be a reason to ignore facts, but too often is. And it has really uncomfortable implications.

But I think we’d better start paying attention to those implications. [my emphasis]

Another example of the damaging effects of Cold War ideology and post-Cold War Triumphalism.

Tags: marxism, paul krugman

What if the bond vigilantes attack the US?

One of the cryptic scenarios inflation scare-mongers and deficit hawks like to throw around is an attack of the bond vigilantes. Paul Krugman looks at this scenario in The Simple Analytics of Invisible Bond Vigilantes Nov 2012, a paper which is warns is wonkish. But the conclusion is clear:

Think about it this way: with the Fed setting interest rates, any loss of confidence in U.S. bonds would cause not a rise in rates but a fall in the dollar – and a fall in the dollar would be a good thing, helping make US industry more competitive.

You can elaborate on all this, in particular by making a distinction between long-term and short-term interest rates. But it’s really hard to create a scenario in which the bond vigilantes actually cause a contraction rather than an expansion when they attack. Things will be different if you have large debt denominated in foreign currency – but we don’t.

So what are the fiscal fear types thinking? Basically, they aren’t. But to the extent that they do have a model, ... – they’re imagining that American macroeconomics are just like those of a country on a fixed exchange rate with no independent monetary policy.

He elaborates on it in a couple of blog posts. In When Confidence Hurts 11/12/2012, he talks about how his analysis fits other financial crisis of the last few decades:

The point, of course, is that America doesn't have a lot of foreign-currency debt. Neither does Japan — which is why I would say yes, reduced confidence in Japanese bonds would actually help their economy. Right now, as I’ve written in the past, the collision of deflation with the zero lower bound means that Japan actually offers investors a higher real interest rate than they can get in other advanced countries. The result is a strong yen that is really hurting Japanese manufacturing. Some loss of faith in those Japanese bonds, whether default risk or fear of higher inflation, would be a blessing.

Oh, and one more thing: there are cases right now of countries with their own currency but with lots of foreign-currency debt that make depreciation contractionary versus expansionary — for example, Hungary (where lots of people took out mortgages in Swiss francs!) So this is still a relevant distinction.

In More on Invisible Bond Vigilantes 11/10/2012, he cites this 10/18/2012 letter under the letterhead of the Financial Services Forum signed by various CEOs, including whinin' Jamie Dimon of JPMorgan Chase and Brian Moynihan of Bank of America, using fiscal cliff scaremongering to indulge in (code-worded) lobbying for the Grand Bargain to cut benefits on Social Security, Medicare and Medicaid. Krugman's response:

The letter is actually kind of amazing in a bad way even before we get to that issue: the CEOs apparently can’t or won’t get their heads around the fact that the fiscal cliff issue is all about doing too much, not too little, to reduce the deficit. Somehow, by the fourth paragraph concerns about a rise in taxes and a fall in spending depressing demand have turned into bond-vigilante fearmongering, with a warning that Moody’s might downgrade US bonds and send interest rates up. Guys, that’s not what we’re talking about here.

But even if we accept the bait-and-switch, from fiscal cliffery to fear of what will happen if we don’t have a Grand Bargain now now now; and even if we ignore the likely market reaction to a Moody’s downgrade, which would probably be a collective yawn (remember that absolutely nothing happened when S&P weighed in); the logic is still wrong. Even if Moody’s succeeded in scaring people, this would mean a weaker dollar rather than soaring rates — and this would be good, not bad, for the US economy.

It’s scary to think that such muddled thinking has dominated "serious" discussion.

Tags: austerity economics, paul krugman, us economy

Why opponents of Social Security are lying when they say it's a "Ponzi scheme"

Paul Krugman shoots down one of the favorite arguments of the let-Grandma-eat-catfood crowd, the idea that Social Security is a "Ponzi scheme", in Things That Aren’t Bubbles 10/22/2012:

Take the common claim on the right that Social Security is a Ponzi scheme because the system has few real assets. It's true that Social Security is mainly a system in which each generation pays for the previous generation’s retirement, in the expectation that it will receive the same treatment from the next generation. But like monetary circulation, this process can go on forever; there's nothing unsustainable about it (yes, demography, but that's about the levels of taxes and benefits, not the fundamental nature of the scheme). So there’s nothing Ponziesque at all.

Tags: grand bargain, paul krugman, social security

Financial crises and recessions/depressions

It seems to be pretty generally accepted among Keynesian economists - to the extent someone not a professional economist can hazard such a generalization - that periods of economic downturn started by a systematic financial crisis require longer recovery times than others. Carmen Reinhart and Kenneth Rogoff in Sorry, U.S. Recoveries Really Aren’t Different Bloomberg View 10/15/2012 take a look at the depressions they see as most comparable to the current situation, those of 1873, 1893 and 1907 (which were called "panics" at the time) and the Great Depression of 1929. They write of the 2007 crisis:

The most recent U.S. crisis appears to fit the more general pattern of a recovery from severe financial crisis that is more protracted than with a normal recession or milder forms of financial distress. There is certainly little evidence to suggest that this time was worse. Indeed, if one compares U.S. output per capita and employment performance with those of other countries that suffered systemic financial crises in 2007-08, the U.S. performance is better than average.

This doesn’t mean that policy is irrelevant, of course. On the contrary, at the depth of the recent financial crisis, there was almost certainly a risk of a second Great Depression. However, although it is clear that the challenges in recovering from financial crises are daunting, an early recognition of the likely depth and duration of the problem would certainly have been helpful, particularly in assessing various responses and their attendant risks. Policy choices also matter going forward.

The history of those events also indicates that, absent offsetting policy choices, we can expect employment recovery to be slow:

These historical U.S. episodes are in line with the 2010 findings of Carmen and Vincent Reinhart, who examine severe/systemic financial crises in both advanced economies and emerging markets in the decade after World War II. They document that in 10 of 15 episodes the unemployment rate had not returned to its pre-crisis level in the decade after the crisis. For the 1893 crisis and the 1929 Depression, it was 14 years; for 1907, it took 12 years for the unemployment rate to return to its pre-crisis level.

Paul Krugman emphasizes that this is no reason to look at such results as inevitable (Bubble, Bubble, Conceptual Trouble 10/20/2012):

I get a lot of complaints that people like me are being inconsistent: we say that financial crises are usually followed by prolonged slumps, yet we also want to End This Depression Now! and claim that it could be done very quickly. But there’s no inconsistency: there are simple policy actions that could quickly end this depression now, there were simple policy actions that could have quickly ended depressions past. The problem is that now and then policy makers tend not to take these actions — which is why some of us write books. ...

One last point: we still keep hearing the "structural" argument, that we have to expect prolonged high unemployment because it takes time to turn construction workers into manufacturing workers or whatever. One answer is that this portrait of the economy is factually wrong: job losses have not been concentrated in a few sectors or professions, they have been broadly spread across the economy. But there’s also a conceptual answer: if shifting workers across sectors requires mass unemployment, how come the bubble years — when we were moving out of manufacturing into housing — weren’t high-unemployment years? Why does moving into the bubble sectors mean more jobs, but moving out into other sectors mean fewer jobs? I’ve never heard a coherent answer.

Back to the main point: yes, the aftermath of crises is usually a bad time. But that’s because the policy response to crises is usually lousy. We are repeating that story — but we shouldn’t. [my emphasis]

Tags: paul krugman, us economy

Stuff we need more of in American politcs: Keynesian economics

Paul Krugman wrote last year in Mr. Keynes and the Moderns 06/18/2011:

And as it turns out, Keynes-as-equilibrium-theorist ... has a lot to teach us to this day. The struggle to liberate ourselves from Say's Law, to refute the "Treasury view" and all that, may have seemed like ancient history not long ago, but now that we're faced with an economic scene reminiscent of the 1930s, it turns out that we're having to fight those intellectual battles all over again. And the distinction between loanable funds and liquidity preference theories of the rate of interest – or, rather, the ability to see how both can be true at once, and the implications of that insight – seem to have been utterly forgotten by a large fraction of economists and those commenting on economics.

Say's Law was what Ronald Reagan was taught in college in the 1920s, the theory that supply creates its own demand. It was one reason he found the "supply-side economics" scam so persuasive.

Keynesian economics has it's weaknesses. Not least of which is that it prescribes increasing taxes during economic expansions as a way of keeping overproduction restrained. It's sound macroeconomics, but politically it's nearly impossible.

But the Keynesian idea of expanding domestic government spending and running deficits (and borrowing money) if necessary to so is the best prescription for dealing with recessions.

Also from Krugman, The Triumph of Bad Ideas 06/22/2011:

But can we note just how bizarre our situation is? Keynesian economics has actually come through the crisis with flying colors. The only knock on it is the “Obama tried stimulus and it failed, neener neener” thing — but those of us who took our Keynesianism seriously warned literally from the beginning that the stimulus was far too small.

And yet in the political domain Keynesianism is seen as discredited, while various forms of crowding out/austerity is expansionary talk, which have in fact totally failed — look at interest rates! — have become orthodoxy.

And in the EU that's even more so the case than in the US, which is suffering badly enough from Herbert Hoover economics right now.

Tags: keynes, keynesianism, paul krugman

Krugman on the tax-cuts-for-small-business meme

If you're wondering why the Republican National Convention this year had so much talk about small business, Paul Krugman gives a succinct description of the main reason in Five Points To Nowhere 09/17/2012: "Tax cuts for small businesses actually means tax cuts for rich people; there's a small subset of rich people who own small businesses. But Romney has to cloak the real policy in mom-and-pop rhetoric."

Tags: mitt romney, paul krugman

Greece and the euro crisis today

Representatives of the Troika (EU, IMF, ECB) are in Athens negotiating the next steps in the ongoing Greek bailout. More specifically, the provision of funds to the Greek government for the purpose of paying back sovereign debt obligations whose default could drive the shaky European financial system into deeper crisis.

Γιάννης Ιωάννος (Yannis Ioannou) in his 07/22/2012 Sunday Gulag cartoon picturing German Chancellor Angela "Frau Fritz" Merkel shows camp commandant Frau Fritz arriving with the Troika:

In his 07/19/2012 cartoon, Iannou pictures the leaders of the Greek government coalition parties arriving to operate on patient Greece on behalf of the Troika:

Opposition Syriza Party leader Alexis Tsipras demanded that the Greek government break off the Troika negotiations and instead insist on a new EU summit to develop a solution that doesn't drive the Greek people into poverty (Tsipras calls for government to end troika talks Athens News 07/23/2012):

Addressing the Syriza parliamentary group on Monday, Tsipras voiced his party’s determination to engage in dynamic action against privatisations and made a special reference to the case of ATEbank, calling it a “premeditated crime”.

He also referred to the Hellenic Postbank, stressing that “private interests and their stooges” will be met with his party’s strong reaction.

The Syriza leader further lashed out at the three-party government, accusing it of letting time pass instead of negotiating, effectively accepting the country's "total isolation", as he claimed.

He spoke of "imminent bankruptcy measures," adding that “the programme has failed.” He also said that the memorandum has gone bankrupt and “its architects, like the IMF, are the first to jump ship.”

His reference to the IMF bailing out is a reference to a report that the IMF is going to, well, bail out of aiding Greece. Patrick Donahue reports in Euro Crisis Deepens With New Spain Woes, Short Sale Ban Bloomberg News 07/23/2012:

The Washington-based IMF has signaled to European officials that it will stop paying further rescue aid to Greece, bringing the country closer to insolvency in September, Der Spiegel magazine cited unidentified European Union officials as saying in this week’s edition, published yesterday. It’s “already clear” to the troika that Greece won’t reach the 120 percent target, Spiegel said.

The fund responded to the Der Spiegel report, saying today in a statement it is “is supporting Greece in overcoming its economic difficulties.”

Missing the targets means Greece would need between 10 billion euros and 50 billion euros in additional aid, a potential outcome that the IMF and several unidentified euro- area states are not prepared to accept, Spiegel said.

Once taboo, the possibility that Greece could exit the 17- member monetary union has been voiced this year by European officials who consider the fallout from such a scenario would be the lesser evil against a seemingly perpetual crisis.

Some leading politicians in Frau Fritz' coalition have been basically threatening Greece with outsting them from the eurozone, though that isn't yet official German policy. Most notable so far this week was her Deputy Chancellor and Economics Minister Philipp Rösler (FDP). (Rösler erwartet baldigen Euro-Austritt Athens Spiegel Online 22/07/2012; German Minister Criticized for Greece Comments Spiegel International 07/24/2012)

Conservative Greek Premier Antonis Samaras protested in a pitiful tone. (Antonis Samaras. Griechenklage – "Sie tun alles, damit wir scheitern" Welt Online 24.07.2012) But Frau Fritz' government has no respect or pity for him or his country. After his government fails and he eventually leaves the country because everyone there despises him, he'll may land some nice corporate or investment banking job sinecure for being a loyal toady to One Percenter demands. But who could take him seriously at this point as a spokesperson for Greece?

Paul Krugman warns the German officials that they might want to think this through before they insist on kicking Greece out of the eurozone, because a euro collapse will cost Germany big-time. In A Foolish Lack Of Terror 07/23/2012, he writes:

I’m not saying that Greece should be kept in the euro; ultimately, it’s hard to see how that can work. But if anyone in Europe is imagining that a Greek exit can be easily contained, they’re dreaming. Once a country, any country, has demonstrated that the euro isn’t necessarily forever, investors — and ordinary bank depositors — in other countries are bound to take note. I’d be shocked if Greek exit isn’t followed by large bank withdrawals all around the European periphery.

To contain this, the ECB would have to provide huge amounts of bank financing — and it would probably have to buy sovereign debt too, especially given the spiking yields on Spanish and Italian debt that are taking place as you read this. Are the Germans ready to see that?

My advice here is to be afraid, be very afraid.

But it's probably too late to avoid the disintegration of the eurozone. This week we see the chronic crisis conditions: Greece on the brink, Spain and Italy facing unsustainable bond prices. One of these times, the [landslide starts, dam breaks, or insert your favorite metaphor here]. Krugman thinks the timing of the next major phase of the euro crisis, which most likely will start with a run on Spanish banks, will follow what he calls Dornbusch’s Law after this quote from the late economist Rudi Dornbursch: "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that’s sort of exactly the Mexican story. It took forever and then it took a night." (Krugman, Dornbusch’s Law And The Euro 07/20/2012)

Tags: angela merkel, austerity economics, eu, euro, european union, greece, paul krugman

Jerry Brown and Paul Krugman on the failure of elites, then and now

From Candy Crowley's interview with California Gov. Jerry Brown, CNN 08/05/2011:

CROWLEY: I sense that you are angry?

BROWN: No, I'm not angry. I'm just, I'm alarmed at, uh, at, uh, where America is. I mean, we, you know, you look back at history and all the elites, the ruling families of Europe in 1914 were feeling pretty good about themselves. And yet, it wasn't just a few months into the summer when they began what was an absolute catastrophe. So blindness is compatable with good breeding, good education and good relationships. Well, we don't even have that now in much of Washington. [my emphasis]

From Paul Krugman, who I've been quoting a lot lately, for what I take to be good reasons, The Great Abdication New York Times 06/24/2012:

But now I'm hearing more and more about an even more fateful year [than 1937]. Suddenly normally calm economists are talking about 1931, the year everything fell apart.

It started with a banking crisis in a small European country (Austria). Austria tried to step in with a bank rescue — but the spiraling cost of the rescue put the government’s own solvency in doubt. Austria’s troubles shouldn’t have been big enough to have large effects on the world economy, but in practice they created a panic that spread around the world. Sound familiar?

The really crucial lesson of 1931, however, was about the dangers of policy abdication. ...

None of this should be happening. As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them.

And that's what seems to be happening. The fundamentals of the world economy aren't, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread.

Krugman again, Deleveraging and the Depression Gang 06/25/2012:

Now look at what the serious people say: we must have fiscal austerity, not stimulus, because debt is bad; we must not have unconventional monetary policy, because that would endanger "credibility" (where it’s not at all clear what that means).

So basically, we must do nothing to fix this horrific market failure, and allow unemployment to fester instead.

It’s really awesome, when you think about — not just that we’re committing this massive act of folly, but that it’s all being done in the name of sound policy.

Tags: jerry brown, paul krugman

Senior Greek no-shows at this week's EU summit that will decide their country's fate?

Any political junkie would have to wonder if there isn't more politics and diplomacy than medicine involved in this. But the symbolism is perfect for the degree of economic and political subjugation under which Greece currently operates. From Liz Alderman, Greece’s New Leaders to Miss Crucial Meeting New York Times 06/24/2012:

The nation’s newly installed prime minister, Antonis Samaras, and his nominee for the crucial post of finance minister, Vassilis Rapanos, have been in the hospital since Friday. They will miss a crucial European Union summit meeting on Thursday and Friday that was intended to discuss whether to ease the terms of Greece’s bailout conditions, a government spokesman said Sunday.

Mr. Samaras, who is recovering from eye surgery, and Mr. Rapanos, who was struck by intense abdominal pain, nausea, sweating and dizziness on Friday, will be replaced at the meeting by a ministerial delegation.

Way too much of the German commentary I see on this situation is based on arrogance and a post-truth disregard of the economic realities that have been crashing down on Greece, Ireland, Italy, Portugal and Spain. Here's an example from Deutsche Welle English, No mercy for Greece's new old political elite by Spiros Moskovou 21.05.2012

But what's stopping Athens from convincingly tackling corruption and tax evasion and only then asking for compromises from Brussels and the IMF? And why is it that the Pasok government after 2009 and the caretaker Papademos government in 2011 – which had the backing of both Pasok and New Democracy – had so little to show when it came to fighting corruption and tax evasion?

Despite all the relief about the speedy formation of a new government in what often seems like an ungovernable country in the birthplace of democracy, Europe now has to be firm. It can say 'yes' to somewhat relaxing the reform timetable for the reforms in Athens, 'yes' to growth stimuli to get the economy going, 'yes' to concrete measures to help the weaker strata of society – but Brussels should have no mercy with Greece's new old political elite.

In the current situation, German commentary like that is frivolous, head-in-the-sand arrogance and recklessness.

But it's in line from the signals coming from German Chancellor Angela Merkel. Wolfgang Schäuble, Germany's Finance Minister and Angie's one-time mentor before she coldly knifed him in the back (politically speaking!), says pretty much the same thing. Athens news reports, Schaeuble tells Greece to stop asking for more help 06/24/2012:

"The most important task facing new prime minister (Antonis) Samaras is to enact the programme agreed upon quickly and without further delay instead of asking how much more others can do for Greece," said Schaeuble, a close ally of Chancellor Angela Merkel and Europe's most powerful finance minister. ...

The [new Greek government] coalition's platform particularly challenges euro zone paymaster Germany, which has offered to adjust the lifeline's terms to make up for time lost as a result of two Greek elections since May, but refuses to revise it radically. ...

"The ball is now in Greece's court," said Schaeuble. "It's in their hands to win back the confidence of the people of Europe. They're only going to accomplish that with concrete actions and deeds." ...

In a separate interview on Sunday published in Der Spiegel news magazine, Schaeuble again ruled out any form of collectivised debt such as euro bonds and defended the German government's hard line on that.

"It's because you cannot separate the responsibility for decision-making from the liability," he said when asked why Germany was so adamantly opposed. "That's true for almost everything but especially when it comes to money.

"Anyone who has the chance to spend someone else's money will do that," he added, before telling the reporter: "You'd do that and so would I. The markets know that. And so from that point of view they wouldn't be convinced by euro bonds." (Reuters)

Short version of Schäuble's message to the Greek people: bite me.

And, as Paul Krugman notes, even if the Greek government got the concessions they are demanding, it wouldn't come close to actually solving the problem: "I really can’t see how the relaxation of austerity being demanded by the new Greek government can make more than a marginal difference." (Getting Away With It 06/24/2012) And he doesn't mean that it's not worth doing. He means that it's too small a departure from the austerity madness to do much good.

And in Revenge of the Optimum Currency Area 06/24/2012, he discusses the problems that the ill-conceived nature of the euro currency union is now produced in a catastrophic way. He writes, "the advantages of a single currency come at a potentially high cost."

Tags: angela merkel, austerity economics, eu, euro, european union, greece, paul krugman

Krugman on Ben Bernanke and the cartoon physics of One Percenter economics

Two more of this week Paul Krugman videos from PBS Newshour.

Paul Krugman on Ben Bernanke's 'Green Shoots' 06/20/2012:

Paul Krugman on the 'Cartoon Physics' of the 2008 Crash 06/21/2012:

Watch Paul Krugman on the 'Cartoon Physics' of the 2008 Crash on PBS. See more from PBS NewsHour.

Tags: paul krugman