Nunes on Krugman

Marcus Nunes discusses Clive Crook’s analysis of Paul Krugman, and then adds the following:

All this comes out clearly in Krugman´s May 6 column for the NYT, but I want to be specific in my comment, so I´ll concentrate on one of his favorite arguments, and show it´s misleadingly wrong. Krugman writes:

F.D.R. cut back sharply in 1937, plunging America into recession; the Recovery Act had its peak effect in 2010, and has since faded away, a fade that has been a major reason for a slow recovery.

Wow! In 1937 real government purchases recoiled 4.2% and the economy tanked. In 2012 real government purchases were 4.8% below the 2010 level and the recovery is slow!

Surely something is going on that´s making comparable ‘fiscal austerity’ so much less damning in 2012 than in 1937.

And that ‘something’ is monetary policy.


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29 Responses to “Nunes on Krugman”

  1. Gravatar of Don Geddis Don Geddis
    7. May 2013 at 15:09

    Geoff: Good point, about the Fed conspiracy. Also, don’t forget 9/11, and the moon landings, and fluoride in the water.

  2. Gravatar of Benjamin Cole Benjamin Cole
    7. May 2013 at 18:12

    Marcus Nunes, armed with his excellent charts and clear thinking, has been doing great blogging for years.

    You know, you can develop extremely complicated models that are wrong, or you can read Nunes’ charts, and see what is right.

    The Fed should put the pedal to the metal.

    The risk now, as it has been since 2007, is that the Fed will be too timid, feeble, a weakling uncertain central bank that does not aggressively stimulate the economy, and let everybody know that it what it will do, come what may.

    instead, we are at 1.1 recent inflation, and FOMC members are squabbling and fretting about inflation…

    If Fed doesn’t stimulate now, when would it?

    The market is worried about a weakling Fed…but hoping for real leadership.

  3. Gravatar of Geoff Geoff
    7. May 2013 at 19:05

    “Surely something is going on that´s making comparable ‘fiscal austerity’ so much less damning in 2012 than in 1937.”

    Interesting standard for what constitutes “damning.” More “unemployment” and less “output.”

    Why not have the state print money and hire every last unemployed person to build weapons of war, and sweep the floors in the factories?

    Oh that’s right, we’re not serious about “unemployment” and “output” at all. They’re just used as excuses to achieve another goal, namely, central bank continuance, which requires increasing its credibility.

  4. Gravatar of Tyler Tyler
    7. May 2013 at 19:10

    @ Ben Cole:

    You’re absolutely right and it is painfully obvious: when has there been a better time for FED stimulus?

    I look forward to reading your book!

  5. Gravatar of Frederic Mari Frederic Mari
    7. May 2013 at 23:05

    I really can’t wait to see what happens in Japan if the Central Bank manages to re-inflate…

    I don’t think people will be better off… (though I am still unclear at what is truly wrong with Japan. Their unemployment numbers are low and their per capita GDP growth is weak, granted, but positive. Sure, Debt to GDP ratio is scary as hell and I am not convinced that inflation will be a solution JGBs holders will like…)

  6. Gravatar of Saturos Saturos
    7. May 2013 at 23:10

    A neatve experience with negative IOR: http://ftalphaville.ft.com/2013/05/07/1488492/what-the-danish-negative-rate-experience-tells-us

  7. Gravatar of Frederic Mari Frederic Mari
    7. May 2013 at 23:56

    Saturos, I think you tried to answer my implicit questions, right?

    And the article you posted, if I understood it correctly, is quite interesting.

    Am I getting the conclusion right that a negative IOR did not actually lead to more lending and did nothing to lower rates for end-users?

  8. Gravatar of Grim23 Grim23
    8. May 2013 at 01:17

    Unrelated, but who thinks Im wasting my time and brain cells?
    http://forum.onlineopinion.com.au/thread.asp?article=14956

    Trying to talk to non economists about the zero fiscal multiplier is impossible

  9. Gravatar of flow5 flow5
    8. May 2013 at 06:40

    Monetary & fiscal policies require collaboration. The Danish experiment (using a negative deposit rate) is not strictly comparable to any other Country where a Central Bank pays interest on interbank demand deposits.

    Purchasing eligible securities in the secondary market raises their prices & lowers their yields (increases demand & decreases supply). I.e., paying interest on excess reserves (not required) absorbs “safe-assets” & perpetuates a deflationary spiral.

    Ultra-low money market rates are a symptom of a bad policy mix. If negative carry creates a collateral shortage, then the Treasury can probably offset any deficiency.

    But a higher reserve velocity (& higher savings rates), aren’t the intended goal. The real goal is to facilitate the flow of savings through the shadow banks & non-banks (as they do not compete with the CBs & represent the most important, non-inflationary, economic lending sector). I.e., the real goal is to get the CBs out of the savings business.

  10. Gravatar of ssumner ssumner
    8. May 2013 at 07:19

    Frederic, It’s not a question of whether JGB holders “like” the outcome. They won’t like any outcome. It’s inflation or default. Which would you prefer?

    The goal of negative IOR is not to create more lending. Denmark’s problem is that they are pegged to the euro. Negative IOR won’t fix that. It’s just a tool for stopping the inflow of foreign money. They need to devalue.

  11. Gravatar of Alex A. Alex A.
    8. May 2013 at 07:21

    Isn’t this a good time to give Krugman a face-saving out to support monetary stimulus? Sure, people have fun being bullies and rubbing Keynesians’ noses in the jobs numbers, but I’d much rather have another highly influential Nobel Prize winner focused on the Fed. That’s far preferable to cornering him on fiscal policy; he’s staked his reputation on fiscal stimulus, and it will be very hard for him to give up that position until the Fed gets inflation up to target without Congress’ help. And even then it would be humiliating.

    People have speculated for a long time about what has caused the gradual shift in Krugman’s increasingly shrill rhetoric over the last 15 or so years, and I wonder if tribalizing public pressure is part of it (from his own readers and from his opponents).

  12. Gravatar of Bill Ellis Bill Ellis
    8. May 2013 at 09:43

    “When your only tool is a hammer…”
    Monetary policy was not the only significant differance between now and 1937.

    Maybe the differance in effects has to do with the fact that we had a social safety net in place (as woeful as it is ) that kept the 2007 collapse form being as catastrophic to the average person as the great depression was.

    Imagine the alternate universe (it probably does exist ) where the Austrians had successfully killed the welfare state by the time the economy went down the tubes. Is their any doubt it would have looked much more like the Great depression then it ended up for us in this universe?

    The social safety net gives an economy a robustness in times of economic down turns that the Fragile economy of 1937 did not have.

    I forget…. multipliers don’t exist….. so never-mind.

    Not that Monetary policy has not been better this time… but to say it is “the” differance..? …S t r e t c h.

  13. Gravatar of TallDave TallDave
    8. May 2013 at 10:04

    Wasn’t 1937 also the year of the massive general strikes?

  14. Gravatar of Bill Ellis Bill Ellis
    8. May 2013 at 10:26

    The M&M’s and Keynesians largely agree on the right Monetary policy …so it is strange to me, unendingly so, that the M&M’s keep acting like Keynesians are opposing them on Monetary policy. That’s messed up.

    Even when it comes to the M&M’s wildest dreams…(A NGDP Futures Market for example )…Keynesians are not particularly against it, we can’t be, because we can’t see it. All we can be is skeptical.

    And further…I bet you most Keynesians would say that during “normal” economic times, that Monetary policy (combined with a fiscal policy to control deficits ) is the BEST macro tool we have for stabilizing the economy.
    Where’s the problem ?

    The disagreements Between M&M’s and Keynesians on Monetary policy are conceptual, not practical. (Fiscal is an area of real policy disagreement )

    It is like until the Keynesians will surrender the conceptual battle, and say that NGDPLT is … “One Ring to rule them all, One Ring to find them, One Ring to bring them all and in the darkness bind them.” then real agreement on policy will be ignored by the M&Ms’… NO. Worse. Misconstrued.

    What does one call a group of people who care more about ideological agreement than practical solutions ?

  15. Gravatar of TallDave TallDave
    8. May 2013 at 10:27

    Bill,

    The Great Depression wasn’t that hard on the average person (most people had a job), but it was very hard on the people who could not find work.

    With no welfare state to manipulate the mortgage market, there probably would have been no financial crisis in the first place. Also, incentives to produce would have been much higher, and resources utilized more efficiently. We’d probably have PPP GDP per capita of $60K-$70K by now, rather than $50K.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. May 2013 at 10:58

    Marcus Nunes’ post caused me to reread E. Cary Brown’s “Fiscal Policy in the “Thirties: A Reappraisal” (American Economic Review, Vol. 46, No. 5, December 1956, pp. 857-879) and Larry Peppers’ “Full Employment Surplus Analysis and Structural Changes” (Explorations in Economic History, Vol. 10, Winter 1973, pp. 197-210), both of which are mentioned in the Douglas A. Irwin paper on gold sterilization and the recession of 1937-38 which Marcus discusses.

    Peppers’ paper shows how to calculate cyclically adjusted budget balances from Brown’s paper. By my arithmetic, according to Brown’s data the cyclically adjusted general government balance increased by 3.0% of potential GDP in calendar year 1937. Peppers only looks at the federal budget, and he finds that the cyclically adjusted federal government balance increased by 3.5% of potential GDP in calendar year 1937 and another 0.1% in 1938 for a total of 3.6% of potential GDP.

    According to the April 2013 IMF World Economic Outlook (WEO) the U.S. general government structural (cyclically adjusted) balance will increase by 3.9% of potential GDP between calendar years 2010 and 2013. And the March 2013 CBO estimates of the cyclically adjusted federal budget balance show it will rise by 4.6% of potential GDP between fiscal years 2009 and 2013.

    So apparently we have repeated the fiscal mistakes of 1937 with approximately a 30% bonus and yet the economy has not plunged into a renewed depression.

    Still looking in vain for that darned liquidity trap Krugman keeps talking about!

  17. Gravatar of Bill Ellis Bill Ellis
    8. May 2013 at 11:42

    Tall Dave says… “The Great Depression wasn’t that hard on the average person”

    I guess my parents were lying to me ? … and every other person that lived through it that I ever talked to ?
    For not being that bad it sure scarred them.

    Just having a job did not mean ends could be met.

    Anyway, equivocations aside, you are not suggesting that the suffering of the Great depression and the suffering of this modern depression are even roughly equatable are you ?

    Best regards… Short Bill.

  18. Gravatar of Pemakin Pemakin
    8. May 2013 at 12:45

    Bill,

    You’re ignoring that the Sumner critique undermines Keynesian fiscal policy arguments. It puts MM into natural conflict with Keynesians at this stage of the recovery cycle (i.e well after the bottom). I think this would be the case even if the Fed was doing more and had NGDP growing at over 5% with a full monetary offset. The Keynesians would be arguing that “the recovery is too fragile to implement austerity”.

    I would be interested in any historical record of any current old Keynesians (New Keynesians don’t count) arguing for shrinking government spending except defensive spending.

  19. Gravatar of Negation of Ideology Negation of Ideology
    8. May 2013 at 15:27

    Bill Ellis –

    “Where’s the problem ?

    The disagreements Between M&M’s and Keynesians on Monetary policy are conceptual, not practical. (Fiscal is an area of real policy disagreement )

    It is like until the Keynesians will surrender the conceptual battle, and say that NGDPLT is … “One Ring to rule them all, One Ring to find them, One Ring to bring them all and in the darkness bind them.” then real agreement on policy will be ignored by the M&Ms’… NO. Worse. Misconstrued.

    What does one call a group of people who care more about ideological agreement than practical solutions ?”

    You mention fiscal policy as an area of practical disagreement, and then say we care about ideological agreement than practical solutions. How can you have it both ways?

    Disagreeing on fiscal policy seems to be a huge difference that can’t simply be swept under the rug by saying you sort of agree with us on monetary policy, except at the zero bound.

    By the way, I don’t dislike Krugman – I bought his book and enjoyed reading it. (Not nearly as much as I enjoyed Ben and Marcus’s book though.)

  20. Gravatar of Bill Ellis Bill Ellis
    8. May 2013 at 15:28

    Pemakin,

    I am not ignoring the “Sumner Critique”. I think it is not valid. On its’ face It is a political argument disguised as a economic argument. The FED does not Have to undermine fiscal stim by raising rates. It is a choice.

    After this political element is addressed… the “Sumner Critique” argument is Ultimately based on denying that Multipliers exist.

    I guess that multipliers may not exist is debatable. (Not to my mind.) But that is a different argument.

  21. Gravatar of Jim Glass Jim Glass
    8. May 2013 at 18:22

    @Bill Ellis

    I am not ignoring the “Sumner Critique”. I think it is not valid. On its’ face It is a political argument disguised as a economic argument. The FED does not Have to undermine fiscal stim by raising rates. It is a choice.

    You just made an argument in favor of the superiority of monetary over fiscal stimulus — and not wasting any more effort trying to get fiscal stimulus. If the Fed *can* make moves to offset the effects of fiscal policy, then monetary policy *is* effective, zero bound or no.

    When I was taking grad econ courses in the 1980s with professors from the NY Fed across the street, the discussion of stimulus in my textbooks said: fiscal stimulus was obsolete and inferior because it is administered through the political system which makes it slow to be enacted, distorted for partisan gain, ripe for rent-seeking, at its least bad inefficient through bureaucracy and administrative difficulties, all at the permanent fiscal cost of increasing the national debt and the future deadweight cost of taxes. While monetary stimulus is administered instantly in a day and on the other counts has zero of the defects (adding to the national debt) or greatly minimized costs (the politics of seven Governors versus 535 Congressional members plus a president, two national political parties working at all levels…)

    This was “textbook” even way back then ago. Every textbook I’ve seen since then has said the same thing. IIRC Krugman’s textbook says much the same.

    Given that they weren’t all wrong, the only argument to prefer fiscal stimulus as an alternative is that for some reason monetary stimulus is just plain impotent right now. If it isn’t impotent, then there is *no* argument to prefer fiscal stimulus. Even Krugman recently has stamped his foot to emphasize he prefers monetary stimulus when they both work, and slurred people for (he says) portraying him otherwise.

    Now, you can argue that it’s a political issue, “politically the Fed does not have to undermine fiscal stim”, but c’mon! Get real! If you want more stimulus and think the issue is *politics*, what political obstacle do you think is easier to overcome, convincing 4 of 7 members of the BofG or the entire US political system starting on Capitol Hill and from there on down? Including the Evil Republicans, Tea Party, and all the rest?

    To say, “the Fed’s BofG is irredeemably politically obstructionist to stimulus, thus I support fiscal stimulus, because rather than waste effort trying to move the Fed, it will be *easy* to get another say $700 billion though Capital Hill and the nation’s entire political system” … geeze, one blanches.

    If you want more stimulus, apply your lobbying efforts to get the kind that both you are much the most likely to get and which will give you much higher quality results if you get it: monetary stimulus.

    It’s a choice. The coherent one.

  22. Gravatar of Jim Glass Jim Glass
    8. May 2013 at 18:28

    @Bill Ellis

    *Tall Dave says… “The Great Depression wasn’t that hard on the average person”*

    I guess my parents were lying to me ? … and every other person that lived through it that I ever talked to ? For not being that bad it sure scarred them.

    My parents came through the Depression and told me that they did fine, personally — well, even. My grandfather was career US Navy and his steady income during a period of major deflation gave him and his family a serious increase in real income.

    Tall Dave has put him finger on a major political-economic, public choice factor that politically drives *under* stimulus during periods such as the Great Depression and Great Recession, IMHO.

    Even in such times the great majority of voting people — including the mighty and powerful Median Voter — retain their regular jobs. And with sticky wages, and more recently sticky wage increases (see FRED), during these periods of deflation and disinflation they do OK, even well. So the majority, and the Median Voter, do *not* have any personal interest in procuring more stimulus.

    Of course, they ARE “scarred” by the economic downturn and all the unemployed around them. My parents sure were, even though they did well themselves – there is no contradiction in that whatsoever. (“We sure were *lucky* your grandfather was a career officer with the Navy taking care of him…!”)

    More to the point, they are **scared** by all the unemployment around them. That makes them instinctively *more conservative* about policy … especially about ‘unorthodox’ ‘new’ strange policies that *could increase inflation!* and thus destroy what they have going for them. Their fear, anxiety about protecting what they have, and massive ignorance about economics make them very susceptible to the peddlings of anti-stimulus fear mongers.

    In short, the great majority have no personal direct interest in obtaining more stimulus and can easily come to believe they have a real personal reason to oppose it.

    Thus we see during 1930-on and 2008-on all the endless popular cries of “Fight inflation! No more bubbles! Fight inflation!…” — with the politicians hearing and responding to every one — even as the price level plunges or flatlines and asset prices hit the basement.

    Chronic, prolonged under-stimulus is the Median Voter exerting his will.

  23. Gravatar of Benjamin Cole Benjamin Cole
    8. May 2013 at 18:55

    Tyler:

    If you are reading, thanks!

  24. Gravatar of TallDave TallDave
    8. May 2013 at 19:08

    Bill,

    Maybe you should meet more people? 🙂 They’d tell you the Great Depression wasn’t that bad if you had a job, and most people did. TGD was not catastrophic to the average person, it was catastrophic to the marginal workers (not that we shouldn’t care about them, too). The same is true of the Great Recession, of course, lots of us became millionaires even while massive amounts of wealth evaporated elsewhere.

    Of course the main reason TGR is so much easier on the average person than TGD is that we’re far more productive thanks to decades of accumulated free-market efficiencies — back then no one talked about “funemployment” because not working meant not eating very well, or perhaps at all, because food production was much more expensive. The average person in TGD had to deal with pandemics of diseases we don’t have, two World Wars, hurricanes that killed ten times as many people as they do today…

  25. Gravatar of ssumner ssumner
    9. May 2013 at 04:31

    Alex, I think you have things backwards. Krugman is not the victim of a tribalizing blogosphere, he’s one of the causes. He divides it up into good and evil, and seems proud of doing so—even as wise people like Clive Crook and Tyler Cowen point out the incredible foolishness of what he’s doing. I doubt he even reads my blog.

    People change their minds all the time. Krugman has acknowledged changing his mind on various issues. He’s always favored monetary stimulus. There’s nothing stopping him from saying “I see Congress is at a deadlock, we need to put more pressure on the Fed and other central banks.” It would be a very reasonable thing to say, even given his prior beliefs.

    Bill, Even if you look at transfers, the only plausible explanation is monetary policy.

    TallDave, Higher wages were a factor in the 1937 recession, but of course Krugman denies that as well.

    Bill, You said;

    “What does one call a group of people who care more about ideological agreement than practical solutions ?”

    Are you referring to the Keynesians who favored removing the Bush tax cuts last December, knowing it would slow the recovery?

    Mark, And it’s probably even worse. I believe that much of the “stimulus” in 1936 was a bonus payment to WWI veterans that was universally understood to be a one shot payment. So NK models would predict little effect from not repeating that in 1937, unless I’m mistaken.

    Everyone, Don’t fall into the trap of thinking the Depression didn’t hurt most people, just because most were employed:

    1. Even though unemployment peaked at 25%, far more were unemployed at one time or another during the 1930s.

    2. There was a huge “self-employed” sector, bigger than today. And many farmers, doctors, plumbers, shopkeepers, etc, suffered losses as their consumers cut back. Farm prices fell very sharply, plumbers had less work to do, etc.

  26. Gravatar of J.V. Dubois J.V. Dubois
    9. May 2013 at 06:09

    Maybe a little bit off-topic, but still pertaining to Krugman. This is what he wrote in one of hs latest articles (http://krugman.blogs.nytimes.com/2013/05/06/exchange-rates-and-austerity/)

    “Second, the whole advanced world is in a liquidity trap these days “” and we can’t all massively devalue against each other.”

    Which is kind of surprising because just few months ago Krugman praised so called “currency wars” as means to monetary stimulus: http://krugman.blogs.nytimes.com/2013/02/15/currency-war-confusions/

    This is really confusing, Krugman is trying to have it both ways. If expansionary monetary policy helps – even if applied in dreaded liquidity trap – he may link to articles where he says so. And if it won’t help, he may have even larger number of ready articles where he said so. All he has to do is tread lightly – like for instance not calling out outright stupid comments by his otherwise useful colleagues (like Ed Ball call for less than 2% inflation in liquidity trap) – and he puts himself in win-win situation. I have to wonder if this is all Krugman preparing for some serious carrier in politics.

  27. Gravatar of Jake Jake
    9. May 2013 at 07:17

    It seems to me the main point of contention between the NKs and the MMs is whether the liquidity trap actually exists, but the issue has become too muddled by ideology.

    We need to put fiscal policy preferences aside and focus on the scientific task at hand. Can the Fed boost AD at the ZLB or not? This is the kind of question economists should be able to find a definitive answer for.

  28. Gravatar of marcus nunes marcus nunes
    9. May 2013 at 07:34

    @Jake
    They can and they have. Just check the “Great Depression Laboratory”.
    http://thefaintofheart.wordpress.com/2013/04/23/roadmap-of-the-great-depression-with-sign-posts/

  29. Gravatar of ssumner ssumner
    10. May 2013 at 05:50

    JV, Good find.

    Jake, We know the answer, it’s just that lots of economists don’t pay attention to the evidence. My blog is full of evidence.

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