Archive for the Category Praising Krugman


Krugman on those lost rust belt jobs

Here’s Paul Krugman:

Donald Trump won the electoral college at least in part by promising to bring coal jobs back to Appalachia and manufacturing jobs back to the Rust Belt. Neither promise can be honored – for the most part we’re talking about jobs lost, not to unfair foreign competition, but to technological change. But a funny thing happens when people like me try to point that out: we get enraged responses from economists who feel an affinity for the working people of the afflicted regions – responses that assume that trying to do the numbers must reflect contempt for regional cultures, or something.

I’ve made this same argument in a half dozen recent posts over at Econlog. And I also get people complaining that I have no empathy for the adversely affected workers.

I promote neoliberal policies precisely because they are good for the working class.

PS.  I believe that readers will find my new Econlog post to be of interest.

Take it easy ECB; don’t over exert yourself

In recent months there has been a rising chorus of calls for fiscal stimulus, from pundits all over the world.  If I didn’t know better I’d conclude that the world’s major central banks had run out of paper and ink, and that only fiscal policy remained effective.

And then I get jolted back into the real world:

Many international investors had feared a Brexit vote would undermine the EU and hurt business and market confidence across the euro zone. But surveys point to little impact so far.

As a result, many banks are revising forecasts for further European Central Bank stimulus. JPMorgan says it no longer expects the ECB to cut rates or announce an extension of its bond-buying programme in September after solid growth data.

Well that’s a relief.  For a moment there I had thought that there were other reasons why the ECB might prefer to adopt a policy of monetary stimulus:

Screen Shot 2016-08-28 at 10.01.06 PMSeriously, I don’t think I ever recall a time when so many economists were so out of touch with what’s actually going on in the real world.

As usual, Paul Krugman is able to express my frustration much better than I can. Here’s what he wrote in 1999, one year after his famous 1998 liquidity trap paper that he always likes to cite, and at a time when a bunch of pundits were insisting that Japan needed fiscal stimulus:

“What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?”

PS.  For years I had wondered if I was the first to publish a paper discussing negative IOR as an option.  Not surprisingly, I was not.  Marvin Goodfriend of the Richmond Fed did so in 2000.


Krugman on high stock prices

Paul Krugman has an excellent post discussing why stock prices are relatively high.  Apart from the opening paragraph, where he (implicitly) dismisses the EMH and rational expectations, I almost entirely agree with his interpretation.  (OK, the last bit defending Obama is also a bit questionable.)  I have expressed similar views, although of course Krugman expresses his ideas in a much more elegant fashion.  David Glasner was critical of this observation by Krugman:

But why are long-term interest rates so low? As I argued in my last column, the answer is basically weakness in investment spending, despite low short-term interest rates, which suggests that those rates will have to stay low for a long time.

Here’s how David responded:

Again, this seems inexactly worded. Weakness in investment spending is a symptom not a cause, so we are back to where we started from. At the margin, there are no attractive investment opportunities.

First let’s be clear about what Krugman means by “investment spending” in the quote above.  He clearly does not mean the dollar volume of investment spending, in equilibrium, because equilibrium quantities cannot “cause” anything, including low interest rates.  Instead he means the investment schedule has shifted to the left, and that this decline in the investment schedule (on a savings/investment diagram) has caused the lower interest rates.  And that seems correct.

Unfortunately, Krugman adds the phrase “despite low short-term interest rates”, which only serves to confuse things. Changes in interest rates have no impact on the investment schedule.  There is nothing at all surprising about low investment during a time of low interest rates, that’s normally the relationship we see.  (Recall 1932, 1938, and 2009).

David is certainly right that Krugman’s statement is “inexactly worded”, but I’m also a bit confused by his criticism. Certainly “weakness in investment spending” is not a “symptom” of low interest rates, which is how his comment reads in context.  Rather I think David meant that the shift in the investment schedule is a symptom of a low level of AD, which is a very reasonable argument, and one he develops later in the post.  But that’s just a quibble about wording.  More substantively, I’m persuaded by Krugman’s argument that weak investment is about more than just AD; the modern information economy (with, I would add, a slow growing working age population) just doesn’t generate as much investment spending as before, even at full employment.

I’d also like to respond to David’s criticism of the EMH:

The efficient market hypothesis (EMH) is at best misleading in positing that market prices are determined by solid fundamentals. What does it mean for fundamentals to be solid? It means that the fundamentals remain what they are independent of what people think they are. But if fundamentals themselves depend on opinions, the idea that values are determined by fundamentals is a snare and a delusion.

I don’t think it’s correct to say the EMH is based on “solid fundamentals”.  Rather, AFAIK, the EMH says that asset prices are based on rational expectations of future fundamentals, what David calls “opinions”.  Thus when David tries to replace the EMH view of fundamentals with something more reasonable, he ends up with the actual EMH, as envisioned by people like Eugene Fama.  Or am I missing something?

In fairness, David also rejects rational expectations, so he would not accept even my version of the EMH, but I think he’s too quick to dismiss the EMH as being obviously wrong. Lots of people who are much smarter than me believe in the EMH, and if there was an obvious flaw I think it would have been discovered by now.

David concludes his post as follows:

Thus, an increasing share of total investment has become capital-deepening and a declining share capital-widening. But for the economy as a whole, this self-fulfilling pessimism implies that total investment declines. The question is whether monetary (or fiscal) policy could now do anything to increase expectations of future demand sufficiently to induce an self-fulfilling increase in optimism and in capital-widening investment.

I would add that the answer to the question that David poses is clearly “yes”, as the Zimbabweans have so clearly demonstrated.  I would rather avoid terms like “self-fulfilling pessimism”, as AD depends on monetary policy, or combined monetary/fiscal policy is you are a Keynesian.  Either way it don’t think it’s useful to view AD as depending on the expectations of investors, pessimistic or not.  Those expectations merely respond to what the policymakers are doing, or not doing, with NGDP.

PS.  Yes, I do understand that under certain monetary policy stances, such as a money supply or interest rate peg, exogenous expectations impact AD.  I just don’t think it’s useful to view those pegs as a baseline policy.

PPS.  Let me repeat what I said earlier, we are going to have an interesting test of the impact of uncertainty on (British) GDP, over the next few months.  Not a definitive test (which would require observations with and without NGDP targeting, to tease out AD vs. AS channels), but certainly a suggestive test.  I have an open mind at this point, and am eager to learn.

The Fed did monetary offset and the ECB did not

Who just posted this right-wing market monetarist interpretation of recent events?

Well, the euro area has had a (slightly) shrinking population aged 15-64 since 2008, while the US has not (although our growth is slowing). How does this affect the picture, and what changes?

Europe still does badly, but not by as bad a margin as the raw numbers say:


CreditAMECO database

Furthermore, the shortfall doesn’t start right away. Things really go off track only in 2011-2012, when the U.S. recovery continues but Europe slides into a second recession. That’s also when the euro area inflation rate slips definitively below target, where the US rate doesn’t to the same degree:


CreditEurostat, FRED

What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.

Policy improved after that, with Mario Draghi’s “whatever it takes” stabilizing bond markets and a leveling off of austerity. But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels, pushed inflation down by around a percentage point, and created enduring weakness — because it’s really hard to recover from deflationary mistakes when you’re in a liquidity trap.

Surprisingly, it was Paul Krugman. I’m thrilled, I just wish he’d given us credit for writing lots of posts almost exactly like this one.

And as far as all you Keynesian commenters who complained when I said we’d done as much austerity as Europe, and the real difference was monetary policy, what do you say now?

And all you Keynesian commenters who insisted the ECB could not have offset fiscal austerity because the eurozone was at the zero bound (it wasn’t) what do you say now?

Is Krugman just as clueless as we are?

PS.  People sometimes ask me if I’m depressed that I’ve been unable to get the Fed to do NGDPLT.  I try to be polite, but My God!  We MMs have succeeded beyond our wildest dreams.  An increasing number of famous economists favor NGDP targeting. An increasing number of people acknowledge that monetary policy was actually too tight in 2008.  The idea that the Fed offset fiscal austerity in 2013 has increasing support.  Japan switched policy in 2013, and their CPI is up about 4% (there’s much more work to be done, but previously they were in deflation.)  MMs developed the idea of negative IOR, and then major central banks start adopting it.  Even better, asset market responses to negative IOR announcement are consistent with MM predictions and inconsistent with the heterodox views you get in the financial press.  We predict 2 rate increases in 2016 when the Fed says there’ll be 4, and now the Fed predicts 2.  I could go on and on.  And remember, within the economics profession we are a bunch of nobodies.  If this is failure, I can’t wait for success.

HT:  Michael Darda

PS.  Here’s a screen shot of the PP presentation I’ve been giving for years (I believe I originally got the graph from David Beckworth.)

Screen Shot 2016-04-30 at 5.16.11 PM

A few thoughts on politics and the actual meaning of clown metaphors

Here’s something by Jim Geraghty of the National Review:

Let me offer a thought that every conservative should contemplate, even though it’s one we would rather avoid: What if the American people don’t want smaller government that spends less?

This is where we usually hear talk about how small-government conservatives need “better messaging.” Or someone will insist that there’s a broad desire for a smaller government that spends less, but those Washington insiders and establishment sold out the conservative agenda. But what if Americans have heard the arguments for smaller government, understand the arguments — or understand them as well as they’re ever going to — and have rejected them?

Does a country where the popular vote in the last six elections went for Clinton, Clinton, Gore, Bush, Obama and Obama really crave smaller government?

Polling indicates that 70 percent want a smaller deficit . . . but the only spending cut that gets anywhere near a majority support is to foreign aid — about one percent of the budget — and even that’s close to an even split. “For 18 of 19 programs tested, majorities want either to increase spending or maintain it at current levels.” People want smaller government right up until the point where it actually affects them.

The current Republican front-runner is running against entitlement reform:

Trump opposes any cuts to Social Security and Medicare — and Medicaid, for that matter. In April, at the New Hampshire Republican Leadership Summit, Trump criticized his fellow Republicans for proposing reforms of the entitlement programs that are bankrupting the country: “Every Republican wants to do a big number on Social Security, they want to do it on Medicare, they want to do it on Medicaid. And we can’t do that.” Medicare and Social Security alone face more than $69.1 trillion in unfunded liabilities, but Trump insists that the programs can be saved without cuts. “All these other people want to cut the hell out of it,” Trump said of Social Security. “I’m not going to cut it at all. I’m going to bring money in, and we’re going to save it.

1. It’s meaningless to talk about public opinion on “big government.”  The public doesn’t even understand what the term means.  You might think that big government means Social Security, Medicare, tariffs on Chinese goods, etc., but I assure you that this is now how Americans view the concept.  And since their views on taxes and spending are impossible to meet, in a very real sense they have no opinion.  Or you could say that their opinions could never be enacted, so politicians might just as well ignore them, and instead consider how the public would react to various options that the policymakers are actually contemplating.  That’s where public opinion matters.

2. To a libertarian like me, conservatism that discards the “small government” component represents 100% pure unadulterated evil.  But it would make life much simpler.  I could simply go with the liberal tribe, and no more lame explanations that “I’m conservative on economics and liberal on other issues.”  In my view, Trump is running on a platform of pure evil.

3.  It’s common for the policy preferences of candidates to not add up.  But I’ve never seen a gap anywhere near as large as with Trump.  His statement that he’s going to “bring money in” is almost comically at variance with his tax plan, which basically says “no one should have to pay any taxes“, or at least something pretty close to that.  Since he also favors much more government spending, his plan would bankrupt the country far faster than the plans of Bush, Rubio, etc.  So it’s a nonstarter, which means we basically don’t know anything about what a President Trump would actually do.  Probably the best way to try to figure that out would be to look at what he said before he was a candidate.  I recall he praised Hillary, and thus suspect a President Trump would be essentially an even more macho version of President Hillary Clinton. Or even Obama. Obviously I may be wrong, but whatever he does, it clearly won’t be the issues he’s campaigning on. He won’t expel the illegals (who would pick the fruits and vegetables?) or stop imports from China.

4.  The support for Trump is partly due to the tendency of GOP leaders in Congress to cave on spending issues.  They are viewed as “pussies”.  Trump avoids that problem by promising to be a big spender.  Seriously, where does his support come from?  It comes from those who want to turn the GOP into a European populist party—big government plus xenophobia and macho behavior.  Sarah Palin (who once nearly came to be one heartbeat from the Presidency) says Trump won’t “pussyfoot” around.  But we have a two party system, which is why I continue to predict failure for the GOP in 2016. The Dems can rally around utilitarianism, and politely disagree on whether to follow the Clinton or Sanders versions, whereas the GOP can’t even agree on core values.  Eventually this will sort itself out; in a two party system the two parties always take turns over the longer run.  But the “against utilitarianism” party has a really difficult time right now, especially given that many of its brightest members are approximately right wing utilitarians (at least on economics.)  Geraghty may think that Americans have turned away from small government, but a sizable bloc of the GOP most certainly has not.  A GOP that got rid of the small government faction would have little ability to attract talented people like Greg Mankiw.  (He’s already implied that Trump has a quasi-fascist approach to politics, and I’d guess that’s a pretty serious negative in Mankiw’s eyes.) Recall the recent election where Le Pen came in second in the first round of voting, and lost the general election 75% to 25%.  It wouldn’t be that bad here (Le Pen had to run against the moderate right) but they’d have a hard time getting to 50%.  It’s OK to have a party that’s toxic to intellectuals, and gets 20% to 30% of the vote . . . in Europe. That’s a pretty successful party in a multi-party democracy.  But in the US two party system that won’t work.  The GOP has a lot of work ahead of it.

5.  Someone will have to put Humpty Dumpty back together again in 2017.  I suspect that Paul Ryan will become the de facto leader of the GOP at that time.  It will be interesting to see what he tries to do with the remnants of the party (which might well still control the House.)

6.  You could argue that Ted Cruz is a small government version of Trump, and also a very skilled debater.  If in the end Cruz is not able to beat Trump, it wouldn’t necessarily mean GOP voters like big government, but it would at least suggest the issue is not very high on their radar screen.

7.  Just to be clear, I do not believe that the mainstream candidates (Bush, Rubio, Kasich, Christie, etc.) would bring smaller government to America.

PS.  Of course I was joking when I said Trump proposes to eliminate taxes.  But Trump also likes to clown around; indeed I’ve argued he’s running as a clown.  Here’s the actual plan:

1. If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS saying, “I win,” those who would otherwise owe income taxes will save an average of nearly $1,000 each.

The loss of revenue will be “offset” by massively lower taxes on the upper middle class and wealthy.  And a massive tax cut for corporations.  And more entitlement spending.  With Trump, we’ll all “win”, even the hedge fund guys.  A nation of winners.  Hey, what could go wrong?

Anyone who doesn’t see that Trump is a clown is not paying attention.  Read “I win” 100 times in a row, until it sinks in as to what his game is.  Yes, he’s quite smart when he takes the clown costume off, but so are many circus clowns.  If I wanted to call him dumb, I would not use the clown metaphor.

PPS.  I was completely wrong about Trump’s prospects a few months back (and Paul Krugman was right), so no one should take my views on politics at all seriously.