Paul Krugman: Sharing Abuse Fairly

 

Jeff Frankel sorta-kinda defends Reinhart-Rogoff, and says that Alberto Alesina is the bigger austerity villain, having failed to receive his “fair share of abuse”. Brad DeLong weighs in to say that R-R continue to have a lot to answer for.

Brad is right about that. In particular, Reinhart-Rogoff continue, to this day, to insinuate that the statement that “countries with debt above 90 percent of GDP tend to have slower growth than those with debt below 90 percent of GDP” — which is true, somewhat — is equivalent to the statement that there is a threshold at 90 percent at which bad things happen. This just isn’t true; it wouldn’t be true even if the causality weren’t largely from slow growth to high debt rather than the other way around.

The class of countries with debt>90 includes countries with debt a LOT more than 90; the policy question is whether there is a large dropoff as you go from a bit below 90 to a bit above. R-R keep implying that there is; the data say, very clearly, that there isn’t.

That said, Frankel is right about the need to abuse Alesina too. And I’ve been doing it! (That’s largely what the “confidence fairy” was about!) A fair bit in the recent NYBooks piece, many times on this blog. Mark Blyth’s Austerity focuses on Alesina a lot; Mike Konczal and colleagues at the Roosevelt Institute, and many more, have weighed in.

True, A-A hasn’t made it to Colbert. But their role in this disaster has not been forgotten.

Sharing Abuse Fairly – NYTimes.com

Paul Krugman: German Wages and Portuguese Competitiveness (A Bit Wonkish)

 

There’s a three-cornered debate among Ryan Avent, Tyler Cowen, and Karl Smith over the extent to which a more expansionary ECB policy would help the European periphery.

I very much agree with Avent and Smith that Cowen, who worries that such a policy would largely lead to inflation in Germany rather than a boom in Portugal, is completely missing the point; that’s a feature, not a bug.

But what really puzzles me about Cowen’s exposition here is his misplaced focus on the extent to which Portugal and Germany are in direct competition with each other, or to which Germany is Portugal’s main export market. This is very nearly irrelevant — because the point is that Germany and Portugal, for better or (mainly) worse, now share a currency, and what happens in Germany very much affects the value of that currency relative to other currencies.

Cowen writes that rising wages in Germany

solves (at best) only one of the core problems of the eurozone, namely incorrect relative prices between Portugal and Germany. It helps less with the “Portuguese nominal wages are too high” problem …

OK, stop right there. When you say “Portuguese nominal wages are too high”, you have to explain, too high relative to what? As Rudi Dornbusch always used to say, it takes two nominals to make a real.

And the answer, clearly, is “too high relative to German wages”. What else could it be?

But, you say, Portugal doesn’t compete that much with Germany. Ahem. Suppose that I could wave a magic wand (or play a few notes on a a Magic Flute) and suddenly increase all German wages by 20 percent. What do you think would happen to the value of the euro against the dollar and other currencies? It would drop a lot, yes? And Portuguese exports would become a lot more competitive everywhere, including non-German and indeed non-Euro destinations.

I guess I thought this was obvious. Apparently not.

Again, as Ryan says, the crucial difference between German/ Portuguese economic relations and, say, US/ El Salvador relations is that Germany and Portugal share a currency. This creates obligations for Germany, whether it likes them or not.

German Wages and Portuguese Competitiveness (A Bit Wonkish) – NYTimes.com

Paul Krugman: Old-fashioned Austerity

 

Matthew Yglesias piles on Michael Kinsley too, and makes a point I’ve also tried to make in the past: if the real problem is that we overspent and lived beyond our means, we should be working harder, not throwing millions of people into unemployment. Yglesias makes his point with the case of Iceland, which has indeed restored relatively full employment while continuing to suffer somewhat reduced real income.

But there’s an even better example from the historical record: Britain after World War II.

In fact, when people used to refer to Austerity Britain, they were referring to the half-dozen years after the war when Britain had very high public debt, much reduced overseas assets, and in general found its economic situation much straitened.

So what was the British economy like? Well, there was rationing, which people hated. There were exchange controls. There was financial repression. All very terrible things, unacceptable by modern standards, right? But there was full employment! Here’s a chart from here, mysteriously missing the year labels, but you can see the war clearly:

And here’s UK public debt as a percentage of GDP over the same period:

So, our grandfathers (or strictly speaking the grandfathers of the Brits — we never had austerity of any kind) — responded to high levels of debt with an economy in which life was pretty hard for investors, luxuries were hard to come by even for the middle class, and everyone worked hard — but, you know, everyone had a job. We’ve responded to much lower levels of debt by ensuring that the economy functions far below potential, millions of people who want to work can’t find jobs, and many people see all their hopes for the future slipping away.

Progress!

Old-fashioned Austerity – NYTimes.com

Paul Krugman: The Smith/Klein/Kalecki Theory of Austerity

 

Noah Smith recently offered an interesting take on the real reasons austerity garners so much support from elites, no matter hw badly it fails in practice. Elites, he argues, see economic distress as an opportunity to push through “reforms” — which basically means changes they want, which may or may not actually serve the interest of promoting economic growth — and oppose any policies that might mitigate crisis without the need for these changes:

I conjecture that “austerians” are concerned that anti-recessionary macro policy will allow a country to “muddle through” a crisis without improving its institutions. In other words, they fear that a successful stimulus would be wasting a good crisis.

…

If people really do think that the danger of stimulus is not that it might fail, but that it might succeed, they need to say so. Only then, I believe, can we have an optimal public discussion about costs and benefits.

As he notes, the day after he wrote that post, Steven Pearlstein of the Washington Post made exactly that argument for austerity.

What Smith didn’t note, somewhat surprisingly, is that his argument is very close to Naomi Klein’s Shock Doctrine, with its argument that elites systematically exploit disasters to push through neoliberal policies even if these policies are essentially irrelevant to the sources of disaster. I have to admit that I was predisposed to dislike Klein’s book when it came out, probably out of professional turf-defending and whatever — but her thesis really helps explain a lot about what’s going on in Europe in particular.

And the lineage goes back even further. Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence. This is pretty close to the argument that we must have austerity, because stimulus might remove the incentive for structural reform that, you guessed it, gives businesses the confidence they need before deigning to produce recovery.

And sure enough, in my inbox this morning I see a piece more or less deploring the early signs of success for Abenomics: Abenomics is working — but it had better not work too well. Because if it works, how will we get structural reform?

So one way to see the drive for austerity is as an application of a sort of reverse Hippocratic oath: “First, do nothing to mitigate harm”. For the people must suffer if neoliberal reforms are to prosper.

The Smith/Klein/Kalecki Theory of Austerity – NYTimes.com

How the Case for Austerity Has Crumbled by Paul Krugman | The New York Review of Books

 

In normal times, an arithmetic mistake in an economics paper would be a complete nonevent as far as the wider world was concerned. But in April 2013, the discovery of such a mistake—actually, a coding error in a spreadsheet, coupled with several other flaws in the analysis—not only became the talk of the economics profession, but made headlines. Looking back, we might even conclude that it changed the course of policy.

…

The Reinhart-Rogoff debacle has raised some hopes among the critics that logic and evidence are finally beginning to matter. But the truth is that it’s too soon to tell whether the grip of austerity economics on policy will relax significantly in the face of these revelations. For now, the broader message of the past few years remains just how little good comes from understanding.

How the Case for Austerity Has Crumbled by Paul Krugman | The New York Review of Books

Antonio Fatas and Ilian Mihov on the Global Economy: Time travel in Euroland

 

Unfortunately, this is not news by now, but the president of the Euro group, Jeroen Dijsselbloem in an interview with CNBC yesterday dismissed the role that fiscal policy and monetary policy can have to address the economic crisis (emphasis is mine):
“Monetary policy can really not help us out of the crisis. It can take away the pressure, it can accommodate new growth, but what we really need in all countries is structural reforms in the first place. I’d just like to stress the point that in the policy mix of fiscal policy, monetary policy and structural reforms — I’d like the order to be exactly the other way around. Structural reforms in the first place, fiscal policy and viable targets in the mid-term for all regions in second place — and monetary policy can only accommodate domestic economic problems in the short-term.”
It is not exactly clear what to make out of his statement but it seems that long-term solutions should come first before we implement those that will help us in the short term. It is surprising that even today there is such a great confusion about long-term versus cyclical problems.
This confusion comes from a basic belief that some hold that there is nothing inherently different in the dynamics of an economy when one looks at the short run and the long run. This is part of a never-ending academic debate but when it comes to policy makers and politicians it seems to be more a matter of beliefs.
What it is not always understood is that we are dealing with two separate problems and therefore we need two different set of tools or solutions to deal with them.
It is possible that irresponsible behavior, excessive spending and accumulation of debt (private or public) are the cause of the Great Recession. And if this is true, it will require future adjustments to spending plans, deleveraging, and fiscal discipline to avoid a repetition of this event in the future.
But once the crisis started we are dealing with a second problem: a recession that moves us away from full employment. This is a cyclical phenomenon that is well described in macroeconomic textbooks and to deal with it we use monetary and fiscal policy. The fact that potentially debt and excessive spending were the cause of this cyclical event does not mean that we need to deal with these imbalances now to get out of the crisis. We are dealing with two separate phenomena that are only related because one possibly led to the second one, but the dynamics associated with each of them are very different and the recipe to get out of them can be, in some cases, the opposite.
This is what we write in all macroeconomics textbooks: what works in the short run might not work in the long run. As an example, we emphasize the importance of saving in the long run to drive investment and growth. But when we talk about the short run we emphasize the importance of spending to understand fluctuations in economic activity. Excessive spending hurts growth in the long run but it is spending and demand what drives growth in the short run.
There will be a day when we will have to debate about whether the cyclical phenomenon has already been addressed because we are back to full employment and therefore all our focus should be on the long term, but it is very hard to argue that this is where Europe is today. My point is not to deny that there are many deep structural issues to be addressed among Euro countries, but to recognize that we are dealing with two set of dynamics that require different solutions and until we invent time traveling the short term still comes before the long term.
Antonio Fatás

Antonio Fatas and Ilian Mihov on the Global Economy: Time travel in Euroland

The underscore is mine.

Which Textbook Is That, Exactly?

 

OK, on the road, and a quick post over coffee.

Ryan Avent, like me, was favorably impressed by the Nick Crafts piece on British policy in the 1930s. I was, however, slightly puzzled, in a tooting-my-own-horn fashion, by the reference — which I missed in Crafts, but was repeated and emphasized by Avent — to the “textbook approach” of raising inflation expectations to escape a liquidity trap.

Um, which textbook is that, exactly? As far as I know, among basic textbooks only Krugman/Wells even talks about the liquidity trap; certainly we were the only one talking about it before 2008. And the whole discussion of inflation expectations and monetary policy in a liquidity trap as a sort of inverted version of the usual credibility problem — in fact, the whole revival of the liquidity trap as a modern concern — dates from this paper (pdf).

This isn’t purely self-promotion (although obviously that’s part of it). I do think that one reason I’ve done pretty well in tracking this ongoing slump is that I’ve been thinking about liquidity trap issues for a very long time, years before almost anyone else.

OK, while I’m wrenching my arm patting myself on the back, here’s Ryan Grim explaining how one critic, in his desperate attempts to create false equivalence, is forced to invent a character named “Paul Krugman” bearing little resemblance to the person of the same name.

Which Textbook Is That, Exactly? – NYTimes.com

Paul Krugman: Inflation Madness

 

One thing I gather from various economic discussions as well as some of the trolls on this blog is that there’s a widespread view that the kind of monetary policy I advocate — which includes a higher inflation target — isn’t just wrong; it’s madness. It is, I am told in no uncertain terms, proof that I am no longer a real economist, if I ever was.

So I guess it’s worth pointing out the long list of respectable economists with similar views. The point is not to argue from authority — it is, instead, to knock down the other side’s attempt to argue from authority, on the grounds that “nobody” believes that this is a good or even legitimate idea.

So, a brief list of well-known economists who have been pro-inflation under circumstances like those we face today:

Greg Mankiw and Ken Rogoff.

Olivier Blanchard, the chief economist of the IMF.

Mike Woodford, arguably our leading macroeconomic theorist.

Lars Svensson, the deputy governor of the RijksbankRiksbank, although on his way out because his colleagues disagree.

Ben Bernanke, back when he was lecturing the Japanese.

If you think this is a terrible idea, that’s your right. But if you imagine that it’s outlandish and somehow uneconomistic, you’re just ignorant.

Inflation Madness – NYTimes.com

Paul Krugman: Harpooning Ben Bernanke

 

Brad DeLong has the best piece I’ve seen on Bernanke rage among the hedge funders. His point is that the hedgies keep thinking of the Fed as if it were a rogue trader driving prices away from their natural value, like JP Morgan’s London Whale, rather than as a central bank trying to achieve full employment and target inflation. Hence their rage at the failure of bond prices to collapse the way they “should”.

I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied.

What you should be doing is macro analysis, using something like IS-LM — something like what I did here, almost three years ago. (The forecasts have gotten worse since, so the implied long-term rate would be even lower).

But instead of saying that maybe this macro IS-LM stuff has a point, they’re raging against the man with the beard.

Harpooning Ben Bernanke – NYTimes.com

Paul Krugman: In Praise of Econowonkery

 

Mike Konczal has an interesting piece on the general question of whether wonk-blogging — the practice of putting up fairly analytical data-heavy posts bearing on policy issues directly on the web, rather than going through more traditional publication channels — is a good thing. He puts it in the context of liberal politics, which it mostly (though not entirely) is; but I’d like to think about it more generally as a way in which data and analysis can be brought quickly to bear on policy discussion.

And not to create any unnecessary suspense: I think it’s had an enormously salutary effect.

First of all, what are we talking about here? Obviously the econoblogs — Mark Thoma, Brad DeLong, Konczal himself, Marginal Revolution (although it plays a surprisingly, well, marginal role in the big controversies), Yglesias, and many more. But also some of the more institutional blogs, notably FT Alphaville and Business Insider, and columns by the likes of Martin Wolf. And as a practical matter some official institutions are effectively part of the ongoing blogospheric discussion: the IMF, both through its official blogs and, if truth be told, via its semiannual World Economic Outlook and other publications, is in effect participating in the discussion more or less on Internet time. Working papers from some of the Feds, notably New York and San Francisco, do the same.

The overall effect is that we’re having a conversation in which issues get hashed over with a cycle time of months or even weeks, not the years characteristic of conventional academic discourse. Is that a problem?

OK, first point: many people seem to have a much-idealized vision of the academic process, in which wise and careful referees peer-review papers to make sure that they are rock-solid before they go out. In reality, while many referees do their best, many others have pet peeves and ideological biases that at best greatly delay the publication of important work and at worst make it almost impossible to publish in a refereed journal. Gans and Shepherd wrote about this almost 20 years ago, and the situation has surely not improved.

I’m told by younger colleagues, in particular, that anything bearing on the business cycle that has even a vaguely Keynesian feel can be counted on to encounter a very hostile reception; this creates some big problems of relevance for proper journal publication under current circumstances.

A second point is that events are moving fast, and the long lead times of conventional publication essentially guarantee that it will be irrelevant to current policy issues.

Still, all of this would be cold comfort if wonkblogging was just generating noise and confusion. But from where I sit, the reality has been just the opposite.

Look at one important recent case — no, not Reinhart/Rogoff, but Alesina/Ardagna on expansionary austerity. Now, as it happens the original A/A paper was circulated through relatively “proper” channels: released as an NBER working paper, then published in a conference volume, which means that it was at least lightly refereed. Proper science!

Except that it was all wrong. And how did we find out that it was all wrong? First through critiques posted at the Roosevelt Institute, then through detailed analysis of cases by the IMF. The wonkosphere was a much better,much more reliable source of knowledge than the proper academic literature.

And I would say that in general the quality of economic discussion we’ve been having in recent years is the best I’ve ever seen. Yes, there’s junk economics out there, but when was that not true? And yes, it can be hard for lay readers — or for that matter, it seems, quite a few people with heavy economic credentials — to tell the junk from the real insights; but again, when wasn’t that true? As far as real, insightful, useful discussion of matters economic is concerned, this is actually a golden age.

Of course, these useful insights have been largely ignored by policy makers. But once again, when was that not true?

So wonk on proudly. As Martha Stewart would say, it’s a good thing.

In Praise of Econowonkery – NYTimes.com