Paul Krugman: Notes on Current Research

Notes on Current Research, by Paul Krugman, in NY Times: Busy today, so just quick notes on two recent working papers.

One, from the IMF (pdf), tries to estimate fiscal multipliers with an allowance for the likelihood that they are very different in a deeply depressed economy. The paper finds a large negative effect of spending cuts under such circumstances, a much smaller effect of tax hikes.

I wouldn’t treat this result as gospel — studies like this are often quite sensitive to modeling strategy. What’s interesting about it, however, is that it runs completely counter to a result that IS treated as gospel among many right-leaning economists — the claim, allegedly based on evidence, that spending cuts are much less contractionary than tax hikes. Is this conflict a result of failure to take the state of the economy into account? Stay tuned.

The other, from the Boston Fed (pdf), looks at the recent deterioration of the Beveridge curve — the apparent worsening of the tradeoff between vacancies and unemployment. Many people have argued that this is evidence of structural unemployment, of workers not having the right skills or something like that. But the authors show that the worsening of the tradeoff seems to apply to all skill groups, all types of work, and so on. But they also find something else: the short-term unemployment rate has fallen just as we might have expected, it’s long-term unemployment that’s higher than it “should” be. And as Brad DeLong suggests, this is very much consistent with a story in which long-term unemployment makes it hard to get back into employment — exactly the kind of thing we should fear, because it means that failure to address the slump is damaging the economy’s long-run prospects.

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