There are so many great Krugman posts while I was away that I hardly know where to begin:
But there’s a funny point I hadn’t thought of until Matt O’Brien pointed it out. The alleged justification for chain-linking is that the conventional consumer price index overstates true inflation; it might overall, but probably not for seniors. In any case, however, as Matt points out, the very same Republicans who claim that Social Security benefits should be cut because the CPI overstates true inflation also insist that the Fed must stop quantitative easing, despite the absence of any visible inflation threat, because the real inflation rate is much higher than the official statistics indicate.
And all you commenters and emailers should keep this in mind:
Just to be clear, I’m not saying that there’s nothing there; there may well be, and maybe it’s even profound. But neither I nor most economists are going to make the effort of puzzling through difficult writings unless we’re given some sort of proof of concept — a motivating example, a simple and effective summary, something to indicate that the effort will be worthwhile. Sorry, but I won’t commit to sitting through your two-hour movie if you can’t show me an interesting three-minute trailer.
Well, it depends on the director. But you get the point.
So, why should you care? Well, Fatas and Mihov have it right: if the business cycle is a matter of the economy falling below capacity, rather than fluctuating around potential output, the costs of recessions are much bigger than often portrayed, and focusing on “stabilization” greatly understates the importance of good macro policy.
And this on the emerging markets crisis:
We more or less know the story here. First, advanced countries plunged into a prolonged slump, leading to very low interest rates; capital flooded into emerging markets, causing currency appreciation (or, in the case of China, real appreciation via inflation). Then markets began to realize that they had overshot, and hints of recovery in advanced countries led to a rise in long-term rates, and down we went. (I don’t think QE has much to do with it, although your mileage may vary.)
And about being a team player: this is really bad, because it’s contrary to the whole concept of the Fed. The Federal Reserve chair is not supposed to be part of the administration’s team — he or she is supposed to be an independent force, and independence of intellect is a plus, not a minus (especially when, once again, you’ve been right, as Yellen has).
Cardiff Garcia mocks the WH position as being that they want a pushover who would be fun to have a beer with during a crisis — and there’s enough truth there to make it sting.
All in all, this whole episode is not making anyone think better of Obama’s judgment.
For the following I’d put “bubble” in scare quotes, both otherwise agree:
Now, the thing you need to realize is that the whole era since around 1985 has been one of successive bubbles. There was a huge commercial real estate bubble (pdf) in the 80s, closely tied up with the S&L crisis; a bubble in capital flows to Asia in the mid 90s; the dotcom bubble; the housing bubble; and now, it seems, the BRIC bubble. There was nothing comparable in the 50s and 60s.
So, was monetary policy excessively easy through this whole period? If so, where’s the inflation? Maybe you can argue that loose money, for a while, shows up in asset prices rather than goods prices (although I’ve never seen that argument made well). But for a whole generation?
The following is good, but where are the NYT editors! After four days the typo still hasn’t been corrected (it should be inside money):
Banks are just another kind of financial intermediary, and the size of the banking sector — and hence the quantity of outside money — is determined by the same kinds of considerations that determine the size of, say, the mutual fund industry.
I love this, but interpret it very differently from Krugman:
Simon Wren-Lewis is deeply annoyed at the IMF, and understandably so. How can you publish a paper about fiscal adjustment that explicitly takes no account of monetary policy, and claim that it has any relevance to current problems?
It would be like claiming that fiscal austerity produced the eurozone double dip recession without taking any account of the ECB’s monetary tightening in 2011. Fortunately no good Keynesian would ever do such a thing!
Finally, sheer nominal stickiness / money illusion doesn’t seem to play any role in the Hall/Farmer formulation. Yet we now have overwhelming evidence of the presence of such stickiness, in the form of a large (and increased) share of wages that exhibit precisely zero change from year to year:
And here it’s even worse than Krugman asserted:
Whoa! They apparently imagine that QE was an intuitive reaction by Bernanke, one that academic macroeconomics would never have suggested. Nothing could be further from the truth. By the time 2008 came along, the issue of how to conduct monetary policy at the zero lower bound had been extensively discussed, notably in Krugman 1998 (pdf), Eggertsson and Woodford (2003), and, yes, Bernanke-Reinhart-Sack 2004 (pdf). Indeed, the Fed’s QE policies initially followed the latter paper closely; its more recent shift to a greater emphasis on forward guidance is a move in the direction of the Krugman-Eggertsson-Woodford approach.
Herbert Hoover did QE in 1932. FDR moved toward forward guidance in 1933, under the influence of Irving Fisher and George Warren.
And from the same post:
No, the problem lies not in the inherent unsuitability of economics for scientific thinking as in the sociology of the economics profession — a profession that somehow, at least in macro, has ceased rewarding research that produces successful predictions and rewards research that fits preconceptions and uses hard math instead.
The first thing you want to say is that all the crisis economies — even Indonesia, which had by far the worst time in the beginning — eventually bounced back strongly:
This is in stark contrast to the experience of the countries that seem like the closest parallel to SE Asia this time around, the troubled euro area debtors. Here’s a comparison of Indonesia after 1997 and Greece after 2007, with the later years for Greece being the current IMF projections; the number of years after the pre-crisis peak is on the horizontal axis:
By this point in the aftermath of the Asian crisis, even Indonesia was well on the road to recovery; Greece, Spain etc. are still sinking.
What’s worth remembering is that everything people say about why Greece can’t bounce back — structural problems, corruption, weak leadership, yada yada was also said about Indonesia. So why could Indonesia come back while Greece can’t?
Well, two obvious reasons: Indonesia had a currency that it could devalue, and did, massively. This caused a lot of short-term financial stress, but paved the way for export-led growth.
Look at how well Indonesia did during the global crisis of 2008-09. Now explain to me how a 1.2 percentage point rise in US ten year bond yields are somehow devastating their economy. I don’t deny there’s some link (markets show this), but surely the problems are much deeper.
So stop whining that I’m always picking on Krugman.