Archive for the Category Praising Krugman

 
 

Rothwell on Autor, Dorn and Hanson

A number of people have asked me to comment on a new paper by Jonathan Rothwell, which criticizes a study by Autor, Dorn and Hanson (ADH) on the impact of Chinese imports on the US job market.

I conclude that the economic losses from trade are not as severe as the economics literature currently implies. Workers in the most import-exposed sectors face a risk of layoff and unemployment that is comparable to workers in other sectors, where competition comes almost exclusively from domestic businesses. While it is likely that less import competition would further lower the risk of displacement and boost wages for manufacturing workers, less competition would likely lead to a reduction in the ratio of product quality to price and a drop in consumer welfare. I accept the Autor et al. (2014) finding that import competition lowers wages for U.S. workers in the affected industries — but even still, I find that workers in the manufacturing sector continue to earn a sizable wage premium compared to those with similar experience and education levels in other sectors.

At the community level, these results should not be taken to mean that de-industrialization has been harmless to individuals or even communities. Rather, the results imply that deindustrialization as a result of Chinese import competition plays out no differently than deindustrialization as a result of other forces — such as domestic competition or technological change. Communities relying more heavily on industries facing import competition perform no  worse in this study on summary measures of economic development and consistently show higher growth rates in establishments. They seem to find ways to adapt, maintain wage growth and launch new enterprises.

That’s what I would have expected.  Not surprisingly, Autor, Dorn and Hanson contest Rothwell’s study.

Regardless of whether Rothwell is right or wrong, the press has done an extremely poor job in reporting the ADH study.  Trade economists already knew that specific industries, and even communities, can be hurt by import competition.  The press has suggested that the ADH study shows that China trade resulted in a net job loss to the US, a finding that really would be new.  But as Paul Krugman and I keep pointing out that’s just not so.  Their study is completely consistent with zero net job loss to the US.  That’s because the study looked at the period of 1990-2007, when monetary offset was fully engaged.  So there’s no plausible AD channel.  Of course you can make other arguments, but you can’t show aggregate effects with a cross-sectional study.

All the press coverage of ADH is much ado about nothing.  Maybe China did hurt the overall US labor market, but their study doesn’t show it.  I’m not surprised that the press ignores me, but I am a bit surprised they ignore Krugman, particularly since he has occasionally argued that China was stealing US jobs during the Great Recession.  No one can claim his critique of ADH was based on ideological bias.

PS.  Nor can Autor, Dorn and Hanson be accused of ideological bias.  For instance, they favor TPP.

PPS.  Before you try defending ADH based on non-AD channel arguments, you might consider that at various times in their paper they imply they do have an AD channel in mind.  For instance, when contrasting Germany’s trade surplus with the US trade deficit.

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:

Photo

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:

Photo

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