Archive for May 2015


The view from Vilnius

It seems that the new Greek government is rapidly wearing out its welcome:

Italian Prime Minister Matteo Renzi hailed Tsipras as bringing a “message of hope, not just fear”. Yet within days, Varoufakis angered Rome’s socialist leaders by saying: “Let’s face it, Italy’s debt situation is unsustainable.”

Italian Finance Minister Pier Carlo Padoan said the remarks were “out of place”.

In other bailed-out countries, sympathy for Syriza was mostly confined to the far left, while some mainstream politicians saw Tsipras’s success as a threat to themselves.

One Portuguese minister said privately that the center-right government would not be able to face voters later this year if Greece were given a “discount” on painful pension, wage and labor reforms that Lisbon had made under its EU/IMF program.

Prime Minister Pedro Passos Coelho called Syriza’s election platform “a children’s fairytale” while Tsipras accused Lisbon and Madrid of leading an “axis” bent on sabotaging its bailout negotiations, which both denied.

Presenting his Socialist party’s economic program in April, Portuguese opposition leader Antonio Costas distanced himself from Syriza, promising to meet all European commitments on the budget deficit and debt.


In Spain, radical left Podemos, whose pony-tailed leader Pablo Iglesias described Syriza as a “mirror” in January, has quietly stepped back from utopian campaign promises after seeing Tsipras struggle with the constraints of government.

The upstart party trumpeted Greek plans to end austerity and give free electricity and food to the needy but has now dropped a pledge to default on state debt and said a promised universal salary will be paid only when public accounts permit.

Interviewed by Reuters in March, Iglesias acknowledged that Greece’s difficult negotiations with its creditors showed there was limited scope to change economic policy in Europe.

In the Baltic states, which stoically undertook eye-watering austerity after the 2008 financial crisis, anchored by a single-minded determination to join the euro, there is even less sympathy for Greece and its leaders.

Lithuanian Finance Minister Rimantas Sadzius said Greek threats to default or restructure its debts to the euro zone posed a political problem in his country, where the minimum wage is half and the average pension one-quarter that in Greece.

“If the support money is spent without proper care to return it to the European Stability Mechanism, there will be serious questions raised about differences in living standards, and why a country has a significantly lower minimum wage than a country which it has to support,” he told Reuters.

Latvia too opposes any concessions to Greece on reform, with a spokesman for Finance Minister Janis Reirs saying “there has to be the same, equal attitude towards Greece as there has been to other (bailed-out) countries”.

It’s hard to argue with the Lithuanian perspective.  And as for Podemos, perhaps the fact that Spain is the fastest growing economy in Europe, whereas Greece has just slid into a double-dip recession, might have made them a tad reluctant to continue referring to themselves as a “mirror” of Syriza.

Back in the USA, readers were informed about these events in very different ways by the two top econ bloggers.  Here’s Paul Krugman on February 27th:

Last week, after much drama, the new Greek government reached a deal with its creditors.  .  .  . Greece came out of the negotiations pretty well, although the big fights are still to come. And by doing O.K., Greece has done the rest of Europe a favor.

And here’s Tyler Cowen, from a few days earlier:

I do not assume Syriza “” whom I have called The Not Very Serious People “” have a coherent bargaining strategy at all.  I take this point from a broader reading of history, where I see that quite often leaders in critical positions simply do not know what they are doing.  By no means is that always the case, but it is more often the case than narrative-imposing journalism encourages us to perceive.

Let’s see, who am I going to trust next time on complex international negotiations about which I’m not well informed?  Negotiations like the TPP. Don’t rush me, let me think about it . . .

PS.  This is an interesting rumor:

Meanwhile, some 6,000 miles from Athens, a banknote printing company called Fortress Paper in Vancouver, Canada, has seen its shares climb 67 percent this month on speculation it has a contract with the Greek government to turn on its printing presses if the country decides it needs a new currency.

PPS.  Off topic, I’m beginning to see negative RGDP forecasts for Q1 (revision.)  And today the Atlanta Fed lowered their 2nd quarter GDPnow forecast to 0.7%.  I still think a “recession” is unlikely, but the probability is increasing.  Of course there’s almost no chance of an actual recession, the scare quotes refer to the fact that many people wrongly assume that two negative quarters are a recession.

Report from China

My wife is currently in China, and reported back on recent changes:

1.  Young people in Beijing now carry little cash, and use their cell phone to buy things.

2.  They like to order take out.  It’s often cheaper to use your cell phone to order delivery of a cup of coffee, than to buy one at Starbucks.  Must be nice.

3.  The apartment buildings have individual storage boxes for delivery packages.  The delivery person has the code to open it and leave a package; you use your cell phone to open it and pick up your package. Maybe this high tech stuff is also common here, I’m totally out of touch.  But China wasn’t like this back in 2012, our previous trip.

4.  A Uber-type taxi company is very popular, quick to arrive, and extremely cheap.  It’s first come first serve.  (Last time I was there regular taxis were also cheap, but hard to get.)

5.  She went to a wedding costing $65,000.  I asked if the family was rich, and she said “no.”

6.  One restaurant she attended required all patrons to put their cell phones in small paper bags on the table while they ate dinner.  The goal was to get them to talk to each other, rather than play with their phones.

7.  The police are cracking down on drunk drivers, and as a result people have dramatically cut back on drinking at restaurants.  Many Chinese are now afraid to have even a single drink during dinner.

8.  Services are still really cheap for the locals.  One very nice banquet she attended in a private dining room had 26 dishes, and cost a total of $130 for 13 people.  That includes tax (there is no tipping in China.)  The Chinese Groupon program allows thrifty people to enjoy lavish dinners at even lower prices.  If you are a tourist visiting China you will probably not see these prices; you will pay Western prices for dinner. (Unless you are a famous blogger with unusual restaurant evaluation skills.)

9.  But you will see very low prices for subways, taxis and many other services.  In 2014 3.41 billion rides occurred on the subway, most of any city in the world.  The fare was 32 cents.  (This year it was increased.)  Beijing is expected to add 7 new or extended subway lines this year.  Hey NYC, how’s that Second Avenue line coming along?

10.  Her mom’s maid takes high-speed rail home on holidays.  (700 miles in 4 hours) That’s right, the system “only the rich” would be able to afford.  (Or so they said as recently as 2010, which is like a generation in Chinese terms.  And let’s not even talk about Amtrak today.

Beijing’s official GDP per capita is $16,150, but the actual figure is probably closer to $30,000, in PPP terms.  I would put the odds of Beijing/Tianjin/Yangtze Delta/Pearl River Delta getting stuck in the middle-income trap at roughly zero.  But those regions represent 15% of China. For the rest of Han China, I’d say the odds are 3%.  For western China, 20%.

PS.  Timothy Lee interviewed me for an article on currency manipulation.  Here it is.

PPS.  I have a new post at Econlog criticizing the absurdly high taxes on state lotteries, focusing on the impact on inequality.

How does it feel?

Some of my liberal friends have trouble understanding why Paul Krugman is such a lightening rod for criticism from the right.  Everything he says seems so reasonable.  If you are in this group, I strongly suggest reading Niall Ferguson.  Here’s a small excerpt:

The final piece of Krugman’s analysis was that Cameron and Osborne were “so deeply identified with the austerity doctrine that they can’t change course without effectively destroying themselves politically.” They had “to stick it out until something turns up, no matter how many lives it [austerity] destroys.” Cameron was “the English prisoner”of his own “austerity crusade.” In fact, the government did change course, significantly easing the fiscal tightening in late 2012. Krugman was at first dismissive of these changes as “a set of basically minor twiddles involving credit and planning authorizations, which seem highly unlikely to make any significant difference.” When these “twiddles” turned out to make quite a lot of difference, he cried foul. Why, Cameron and Osborne had stopped doing austerity after two years! How dare they not fulfil Krugman’s apocalyptic predictions!

Krugman has spent much of the last two years trying to dismiss the UK recovery – not surprisingly, as it makes nonsense of nearly everything he has written in recent years. It was, he insisted in September 2013, a “dead-cat-bounce.” The government’s claims of success were “deeply stupid.” The economy’s growth was merely the effect of stopping “banging Britain’s head against the wall.” Comically, in January 2014 Krugman sought to argue that France was the role model Britain should have sought to emulate. By April, however, he had thrown in the towel, but in a typically dishonest way. “The fact that the [UK] economy has perked up,” he argued shamelessly, “is actually a vindication of Keynesian claims, whatever the government’s intentions.” The return to growth – the one he had wholly failed to predict – was “not at all surprising.” There was “nothing here that warranted a major revision of framework.” Perish the thought!

.  .  .

In the words of Jeffrey Sachs – hardly a conservative on economic issues – UK economic performance has in fact been “broadly similar” to that of the United States, “with the UK outperforming the United States on certain indicators,” such as the employment rate (now at a record high of 73.3 percent compared with 59.2 percent in the United States). As Sachs notes, “both the U.S. and UK economies have cast considerable doubt on Krugman’s oft-repeated view that a robust recovery would require further fiscal stimulus.” Amen.

Of course, Krugman was not alone. Martin Wolf of the Financial Times made much the same arguments. So did Simon Wren-Lewis, Jonathan Portes and others. However, none of these Keynesian authors could match Krugman’s unique combination of over-confidence and toxic rudeness. It was not enough to sneer at George Osborne’s policies; he had to be compared gratuitously to one of Monty Python’s “upper class twits.” Osborne’s consistency – a trait Krugman greatly prizes in himself – was “the hobgoblin of little minds, adored by little statesmen.” His policy was “a complete conceptual muddle.” Osborne was “the Rt. Honorable Saboteur.” The government was like “the Three Stooges.” Osborne’s 2014 budget was “ludicrous.”

Krugman is of course in thrall to an Englishman who cannot be credibly described as anything but upper class: John Maynard Keynes. In his vainglorious dreams, Krugman is the Keynes of our time – brilliant, caustic, influential. In his journalism, Krugman frequently alludes to his hero’s work – hence “The Economic Consequences of Mr. Osborne.” But to be Keynes you need ultimately to be credible – credible enough for policymakers to pay heed to what you say. In this regard, Krugman’s career is a story of catastrophic failure – a failure only partly explicable by the fact that, unlike Keynes, he is personally obnoxious.

Amongst many offensive traits, Krugman’s chronic inability to acknowledge error is the most troubling to policymakers, who are subjected to far more rigorous scrutiny than he is. Accusing other economists and the Financial Times of “perceptual sleaze,”Krugman recently had the gall to write: “What’s not OK is blurring the distinction between … political analysis and a real analysis of how policy worked. … When people do that kind of blurring to make the case for policies they prefer, it’s deeply sleazy, no matter who they are.” Lack of self-knowledge on this scale borders on the pathological.

It is easy to forget how seriously the British Left once took Krugman. In a speech forBloomberg in August 2010, Ed Balls named him as one of the few intellectuals who were prepared “to stand up now and challenge the current consensus that – however painful – there is no alternative to the Coalition’s austerity and cuts.” Less than a year later, in a speech at the London School of Economics, Balls again made his debt to Krugman clear. And in his 2012 party conference speech, he went the whole way,parroting Krugman’s prediction of a double-dip recession. This was the peak of Krugmania in the UK. In a gushing editorial in January 2013, the Guardian even urged Ed Miliband to appoint Krugman as Shadow Chancellor. Krugman lectures were now attracting throngs of credulous devotees – though Balls was no longer among them. He had belatedly – but too late – woken up to the fact Krugman’s predictions had been worthless.

But you should really force yourself to read the whole thing.  And don’t focus on the content, rather focus on how it makes you feel.  That’s how right-wingers feel when they read Krugman.

For contrast, read Matt Yglesias describing the same set of events:

For Americans who have followed British politics primarily through the lens of American Keynesians complaining that Cameron’s austerity policies destroyed the British economy, the results may come as a bit of a shock. Is the UK economy actually doing great? Was Paul Krugman wrong about everything?

The truth is more complicated than that. Team Austerity didn’t do as well as a superficial read of the returns would suggest “” the UK economy is in some ways struggling, the austerity question itself was considerably more complicated than the US media debate about it suggested, and fundamentally the biggest issue in the UK economy has nothing at all to do with austerity or overspending.

Matt mostly agrees with Krugman on fiscal stimulus, although he’s a bit less confident about the net effect.  He’s more aware of the uncertainties involved in any counterfactual:

The real debate concerns the past. Cameron and his coalition partner Nick Clegg say that had they not moved to swift fiscal consolidation in the past, the United Kingdom would have been at risk of a Greek-style financial market panic and total meltdown.

It is difficult, in practice, to see how this would have happened. A loss of investor confidence in the fiscal position of the government would have resulted in a falling value of the pound and an expansion/inflationary monetary environment. A falling pound and an expansionary/inflationary monetary environment are exactly what the UK got under austerity. On the other hand, the success of the Bank of England in achieving an expansionary monetary environment in the context of fiscal austerity suggests that fears of austerity crushing the economy were also somewhat misplaced.

Austerity was neither necessary to avoid a meltdown nor sufficient to wreck the labor market. It was simply a policy choice to emphasize small government, less spending, and more employment in the private service sector rather than a more expansive welfare state with more public sector employment.

But the biggest difference is not content, it’s tone.  Yglesias’s post is 180 degrees different from the Ferguson piece, or from a typical Krugman post.  There’s no name-calling.

Inevitably commenters will want to get into the content of Krugman, Ferguson, and Yglesias.  Unless you have something new to say, I’m not really interested.  That’s not what this post is about.

I also recommend this excellent Evan Soltas post on the next big crisis, student loans.

PS.  In a way I sympathize with Krugman.  I can’t understand how anyone could think a fiat money central bank would be unable to debase its currency at zero rates.  I can’t imagine how anyone could think money was not obviously way too tight in 2008 (recall that interest rates were not at the zero bound.)  So I get the frustration he must feel about his views being ignored by the VSPs.  But I also understand that the part of my brain that tells me that the conventional narrative is stupid, is itself unreliable.

Indeed it’s more than unreliable, it’s a logical contradiction.  The conventional narrative can never, ever be stupid, as ‘stupidity’ is defined as reasoning that falls short of the conventional wisdom.

HT:  Marcus Nunes

About that “impotent” monetary policy

Here’s Paul Krugman:

The same impotence of conventional monetary policy that makes open-market purchases of Treasuries useless at boosting GDP also mean that broad monetary aggregates that include deposits are largely immune to Fed influence. The Fed can stuff the banks full of reserves, but at zero rates those reserves have no incentive to go anywhere, and even if they do they can sit in safes and mattresses.

Yes, if open market purchases of bonds don’t boost NGDP, then they would also fail to boost M2.  That’s what the liquidity trap theory says.  But it says far more than that. Here are some other implications of Krugman’s claim:

1.  QE fails to boost stock prices.

2.  QE fails to affect bond prices.

3.  QE fails to affect exchange rates.

You thought Japanese QE depreciated the yen?  That’s just your imagination.  You think QE recently caused the euro to depreciate?  You are hallucinating.  The dollar fell 6 cents on the day QE1 was announced, in March 2009?  That’s a coincidence.

GDP growth accelerated in 2013, despite a $500 billion decline in the budget deficit, and hundreds of Keynesians predicting a slowdown or even recession?  Nothing to do with QE.

HT:  Benn Steil

PS.  I have a new post over at Econlog

Update on the American Sunbelt

The census recently released its 2014 population estimates, which reveal some interesting patterns:

1.  During the decade of the 2000s, 38.4% of US population growth occurred in just 3 states; Texas, California and Florida. In the past year that number rose to 47.2%, in the same three states. Florida passed New York to become the third most populous state. These three states are America’s future, and in a few years I’ll be heading out to the worst governed of the three. Speaking of bad governance, Illinois (which contains dynamic Chicago) lost population, while Michigan (home of Detroit) gained population.  Ouch!

2.  So the Sunbelt is alive and well?  Not quite.  All of the south central states other than Texas did poorly, with Louisiana, Mississippi, Alabama, Arkansas and Oklahoma all growing at less than the national average, and far less than Texas. New Mexico actually lost population.

3.  So Texas must be booming due to the fracking boom?  Nope.  Texas’s population growth began slowing about 8 years ago, just as fracking got underway.

4.  But wait; didn’t North Dakota have the fastest population growth of any state? Yes, but North Dakota only added about 15,600 people, versus 7,600 in South Dakota.  So fracking probably added no more than 10,000 people.  Even if you assume that Texas’s fracking industry is twice as large, it would have added only 20,000 to Texas’s population.  (Probably less, as it discourages non-fracking business.)  But Texas added more than 450,000 people. Fracking is a statistical error, nothing more.  That’s why oil producing Oklahoma and Louisiana grew more slowly than the national average, despite the oil boom.  (The data was from July 1, 2013 to July 1, 2014.)

5.  Populations movements don’t affect politics, as the three big gainers are red, blue, and purple. But even if they were all red or all blue, it wouldn’t matter.  If liberals move to a conservative state or vice versa, it changes the nature of that state. During my lifetime many strongly Democratic states have become very Republican, and vice versa.  It will happen again. In the 20th century each party will win about 1/2 of the elections, just as in the 20th century.  It’s all about the ideas, the horserace doesn’t matter.  Which ideas will each party accept?

BTW, I saw this in The Economist:

Less than a decade ago UKIP was a Eurosceptic pressure group run by disenchanted Thatcherites, such as Mr Farage, and EU-obsessed academics. Now it is hoovering up support from disgruntled elderly and blue-collar voters. Yet the fact that it is also hoovering up their prejudices reflects how populist, not serious, the party is.

.  .  . Some Kippers claim that, in its blundering first stabs at policymaking, the party is simply listening to its new members too well. Yet there is no sense that, when it matures, it will reassert liberal principles””as Douglas Carswell, the party’s first elected MP, clearly wants. The truth is Mr Farage is more opportunist (he would say pragmatic) than liberal. He probably still doesn’t much care what UKIP’s economic policy is, so long as it hastens Britain’s departure from the EU. The result is that libertarian UKIP is likely to end up much like its nativist, authoritarian European cousins.

(Recall that outside the US “liberal” means pro-free market.)  Now reread the first paragraph. Does this remind you of the evolution of a certain political party in the US in recent decades?

Update:  Lars Christensen will begin doing Youtube videos.