Archive for the Category Praising Krugman


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.

The very real problem of wage inequality

A commenter pointed me to Krugman’s recent post on inequality, expecting me to respond that income inequality is meaningless.  Well income inequality is meaningless, but Krugman’s post was on wage inequality, which is a real and growing problem.  It’s not one of the top ten problems facing the country, but probably makes the top 20.  (I’ll do a post on what I think are the big issues, in a few days.)

Krugman presents this graph:

Screen Shot 2015-09-10 at 2.52.56 PMI have read some of the excellent work by Matt Rognlie and Kevin Erdmann, which looks at these issues in more detail.  They found that some of the fall in wage share was going to implicit rents on owner-occupied homes.

I decided to take a fresh look at the data for my own benefit, and compared current (GDI) income (2015:2) with income from 50 years ago (1965:2).  The earlier period was the Golden Age of American labor.

And here’s what I found:

Type of (Gross) income       Share in 1965     Share in 2015

Wages and benefits                   54.6%               53.0%

Indirect taxes – subsidies          7.8%                 6.6%

Net Operating Surplus               25.7%               24.9%

Depreciation                             11.9%               15.6%

It seems silly to focus on gross domestic income, which includes depreciation and indirect taxes.  If we subtract them out we get the more conventional measure of national income, the way most people envision the concept.  And using that measure the labor’s share has been amazingly stable, rising from 68.0% in 1965 to 68.1% in 2015. Capital’s share fell from 32.0% to 31.9%.  No change in 50 years! Is that too good to be true?  Yes, for instance in 1990 labor’s share was 72.4%, so it’s just a coincidence. But it does suggest that labor’s share in the very long run is pretty stable.

So why the perception that workers are not doing well?  Krugman points out (correctly in my view) that it’s an inequality story.  Blue collar workers at GM and Ford are not doing as well as in 1965 (especially younger workers).  Workers like Goldman Sachs executives, Tom Cruise and LeBron James are doing much better than in 1965.  So the problem is not that “workers” are getting screwed by companies, but that worker income is itself becoming more unequal.  That seems like a problem to me, but then I’m a utilitarian who doesn’t think Tom Cruise deserves a high wage income just because he was lucky enough to be born with a lot of charisma and ambition.

Let’s revisit the Jeb Bush tax plan.  The structure of the plan is great; it does lots of wonderful things.  It’s not my dream consumption tax, but it’s vastly better than the current system.  But the left hates it.  I believe the plan is so good that Bush should meet the objections of the left (not now of course, but in the very unlikely event he gets elected.)  The obvious compromise is to keep the structure of the tax system as he proposes, but adjust the tax rates upward enough to make it both revenue neutral and progressivity neutral.

I normally ignore progressivity discussion in the media.  Not because I don’t care about tax progressivity, but rather because no one knows how to measure tax incidence.  Thus even though corporate taxes are not actually paid by corporations, it probably makes sense (politically) to set the new corporate tax rate at a revenue neutral level.  Or perhaps revenue neutral given whatever growth boost the CBO estimates.  And the top rate on personal income needs to be higher than 28%

Unfortunately, with taxes there will never be an end of history.  The fights between the GOP and Dems will continue.  But both sides should be willing to fight with a clean tax regime, not a monstrosity.  You can still nudge the rates up or down, as the elections change who’s in power, but you’ll do so with a much simpler regime.

I’m enough of a supply-sider to understand why the right prefers low MTRs on the rich. But given the very real increase in wage inequality, and given that never in history has it been easier to make a billion dollars by age 30, I really think you need a tin ear to propose a massive tax reform that simultaneously lowers taxes on the group that has done so well in recent decades.

PS. Earlier I said I favor a zero top income tax rate.  I still favor that.  But that’s only if we have a fairly progressive consumption tax.  This post assumes that’s too big a reach, and that this proposal is the best we can do.

PPS.  Although I said Tom Cruise does not deserve a high income, I nonetheless want him to be very rich (for utilitarian reasons.)  That’s because an economy that allows Cruise to be very rich will generate more good films for me to watch.  So yes, he should be very rich, just slightly less very rich than he actually is. Let’s face it, if you get to have young women fawning all over you because you have the guts to do dangerous stunt work in James Bond type films, when you are in your fifties, you are pretty much the luckiest man who ever lived, even if you make the LA minimum wage.

Update:  Kevin Dick sent me to this very nice graph:

Screen Shot 2015-09-10 at 5.38.54 PM

Pop Monetary Economics

Paul Krugman has an excellent post demolishing the following claim by William Cohan, in the NYT:

The case for raising rates is straightforward: Like any commodity, the price of borrowing money “” interest rates “” should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.

BTW, Krugman’s post is the one to read (not mine) if you only look at one post on this topic.  He carefully walks through an explanation of what’s wrong with this paragraph, in a way that would be recognizable to any competent monetary economist. But in some ways it’s even worse than Krugman assumes.  Here’s Krugman:

The Fed sets interest rates, whether it wants to or not “” even a supposed hands-off policy has to involve choosing the level of the monetary base somehow, which means that it’s a monetary policy choice.

That’s also my view, but I suppose one could argue that from a different perspective if you set the money supply you are letting markets determine interest rates, whereas if you actually target interest rates, then you are “interfering” in the market.  Not exactly my view, but let’s go with it.  Let’s put the best spin on Mr. Cohan’s essay.

Now here’s the big irony.  For the past seven years the Fed hasn’t been targeting interest rates, they’ve been using base control to influence the economy, increasing the monetary base through QE programs.  They switched from interest rate control before 2008 to monetary base control after.  And now Cohan is calling for the Fed to raise interest rates.  That means he wants the Fed to go back to manipulating interest rates.

So the great irony here is that in the paragraph I quoted from above Cohan says:

Like any commodity, the price of borrowing money “” interest rates “” should be determined by supply and demand, not by manipulation by a market behemoth.

And yet in the essay he’s actually calling for the exact opposite; he wants the market behemoth (the Fed) to start manipulating interest rates, something it hasn’t been doing for the past 7 years.

Unlike quantum mechanics, monetary economics doesn’t seem too hard.  As a result the media produces a non-stop stream of stories on monetary policy that are utter nonsense.  And by “utter nonsense” I don’t mean stories that disagree with my particular market monetarist views (Cohan might be correct that the Fed should raise rates), but rather stories that are simply incoherent, that are completely detached from the field of monetary economics.

We don’t hire plumbers to teach quantum mechanics at MIT.  We don’t put plumbers on the Supreme Court.  But we do put Hawaiian community bankers on the Board of Governors.  It’s not just that our media and Congress and President don’t understand monetary economics, they don’t understand quantum mechanics either.  The real problem is that they don’t even understand that they don’t understand it.  So they have unqualified people write op eds, and sit on the Board of Governors.  People ask me what Trump or Sanders think about monetary policy.  They don’t even know what it is!  What they think doesn’t matter, even if they were to get elected.  Just as it doesn’t matter what their view is on the best trajectory for NASA’s next Saturn bypass.

BWT, I have no problem with Hawaiian community bankers having important policymaker roles at the Fed, but put them on the committee for banking regulation, not monetary policy.

The title of the NYT piece said the Fed needed to “Show Some Spine”.  Over at the Financial Times they want the Fed to “Show Steel.”  (I guess that makes Paul and me wimps.)  Here’s the argument at the FT:

Yet monetary policy cannot confine itself to reacting to the latest inflation data if it is to promote the wider goals of financial stability and sustainable economic growth. An over-reliance on extremely accommodative monetary policy may be one of the reasons why the world has not escaped from the clutches of a financial crisis that began more than eight years ago.

I suppose that’s why the eurozone economy took off after 2011, while the US failed to grow.  The ECB avoided our foolish QE policies, and “showed steel” by raising interest rates twice in the spring of 2011.  If only we had done the same.

Of course I’m being sarcastic, but that points to another problem with the Cohan piece. Rates are not low because of QE (as Cohan implied), indeed Europe didn’t do QE during 2009-13, and that’s why its rates are now lower than in the US, and will probably remain lower.

If this stuff is published in the NYT and FT, just imagine what money analysis is like in the average media outlet, say USA Today or Fox News.

HT:  Tom Brown, Stephen Kirchner

Catching up with Krugman

Here’s Paul Krugman on Finland:

Why can’t Finland recover this time? Debt is not a problem; borrowing costs are very low. But it’s all about the euro straitjacket. In 1990 the country could and did devalue, achieving a rapid gain in competitiveness. This time not, so that there is no quick way to adjust to adverse shocks:


This shouldn’t come as a surprise; it’s the core of the classic Milton Friedman argument for flexible exchange rates, and in turn for the tradeoff at the core of optimum currency area theory. The trouble in Finland is what everyone expected to go wrong with the euro.

What’s going on in Greece represents a whole additional level of hurt, which nobody saw coming. But it’s important, I think, to realize that even countries that didn’t borrow a lot, didn’t experience large capital inflows, basically did nothing wrong by the official criteria, are nonetheless suffering in a major way.

Krugman’s right that for the most part  (excluding Greece) the euro is failing in exactly the way people like Krugman and Friedman expected it to fail.

Here’s an interesting Krugman observation on Grexit:

But the bigger question is what happens a year or two after Grexit, where the real risk to the euro is not that Greece will fail but that it will succeed. Suppose that a greatly devalued new drachma brings a flood of British beer-drinkers to the Ionian Sea, and Greece starts to recover. This would greatly encourage challengers to austerity and internal devaluation elsewhere.

This is the problem the gold bloc faced after Britain left gold in 1931.  I have a similar view, although I’m a bit less worried about Greece leaving the euro than Krugman, but partly because I think an “experiment” would be useful.  Unfortunately the new Greek government is so incompetent I’m not even sure that devaluation would help, but it’s worth a shot.  (Just to be clear, at this late date I believe Greece would be much better off doing structural reforms and staying within the euro.)

Here’s Krugman (implicitly) discussing the never reason from a price change problem:

In the left panel, you see the Fed funds rate seesawing as the Fed tried to grapple with inflation “” and you see housing starts move strongly in the opposite direction, plunging when rates rose and soaring when they fell. In the right panel, however, you see housing starts and interest rates moving in the same direction “” plunging together. So is there no relationship?

Bad answer. The situations are different in a fundamental way. In the 80s interest rates were being driven by fear of inflation; from the point of view of the housing market, they were more or less endogenous. In the post-2006 period they were being driven largely by the housing bust itself. So the 80s experience was a sort of natural experiment in the effects of rate changes, whereas more recent events are an illustration of reverse causation.

And I’ve been arguing for a long time that there was a regime shift in the late 1980s, that as inflation fears were replaced by the Great Moderation, we entered an era of postmodern recessions in which monetary policy was trying to clean up after bubbles rather than curb inflation.

The point, then, is that when you look for the effects of monetary policy, it’s often important to distinguish between eras when interest rates are a cause and eras when they’re an effect “” and it’s not that hard to know which eras we’re talking about.

My only quibble is that instead of saying it’s only OK to reason from a price change in certain occasions, I prefer saying never reason from a price change—always reason from the thing that caused the price to change (such as tight money in 1981.)  Tight money depressed housing in 1981, no need to even mention interest rates.

PS.  I have a new post on current Fed policy over at Econlog.