Needless to say, he has good reason:

Paul Krugman: Gross Gone: “I don’t know anything about what’s been going on internally at Pimco…

I just read the same stories as everyone else. I have, however, written a lot about Pimco’s macroeconomic analysis (which drove its bond-investment decisions). The interesting thing is the Pimco was initially a bond bull, based on the correct understanding that deficits don’t crowd out lending when the economy is in a liquidity trap; but it then went off the rails, with Bill Gross insisting that rates would spike when the Fed ended QE2. I tried to explain why this was wrong, and got a lot of flak from people insisting that the great Gross knew more than any ivory-tower academic. But I knew what I was talking about!

• Nobody Understands the Liquidity Trap, Still: A correspondent points me to Bill Gross in 2010, declaring that we are in a liquidity trap–and that therefore the Fed’s expansionary policies won’t create jobs, but will simply cause inflation. There’s only one thing to say: AAUUGGHHHH! But a lot of people seem to have fallen into that curious fallacy, as I pointed out in the same year…. The liquidity trap… is a situation in which increasing the monetary base has no effect on aggregate demand, because you’re substituting one zero (or very low) interest asset–monetary base–for another…. Conventional monetary policy is completely sterile on all fronts. I don’t know why this very simple point is so hard to grasp, but people keep making a hash of it. I have no idea why Cullen Roche thinks that the TED spread has anything at all to do with the question of whether we’re in a liquidity trap; nor do I know what I can do, after all the times I’ve written about it, to make the point more clearly.

• Bill Grosses, Idealized and Actually Existing: “Brad DeLong tries at some length to rationalize Bill Gross’s insistence in 2011 that interest rates were about to spike. But while it’s nice to be charitable, to attempt to put the best face on someone else’s arguments, it’s also important to look at the argument someone was actually making. And the reasoning of Gross and others was much cruder and a lot more foolish than Brad acknowledges. I know because I was involved in the debate in real time…”

• 2011 and All That: “All would have been forgiven, indeed never mentioned, but for [Bill Gross’s] utter misjudgment of the bond market in 2011–a misjudgment based on his failure, or more accurately refusal, to acknowledge the realities of a liquidity trap world…. Gross was by no means alone… 2011 was a sort of banner year for bad macroeconomic analysis by people who had no excuse for their wrong-headedness. And here’s the thing: aside from Gross, hardly any of the prominent wrong-headers have paid any price for their errors…. BS are still given reverent treatment…. Paul Ryan warned Ben Bernanke that he was ‘debasing’ the dollar, arguing that rising commodity prices were the harbinger of runaway inflation; the Bank for International Settlements made a similar argument, albeit with less Ayn Rand. They were completely wrong, but Ryan is still the intellectual leader of the GOP and the BIS is still treated as a fount of wisdom. The difference is, of course, that Gross had actual investors’ money on the line.”

• The Pimco Perplex: “It’s fairly clear that the events of 2011 are a large part of the story of Bill Gross’s abrupt departure…. But why was Gross betting so heavily against Treasuries? Brad DeLong tries to rationalize Gross’s behavior in terms of a coherent story about an impending U.S. recovery, which would lift us out of the liquidity trap. But Gross wasn’t saying anything like that. Instead, he was claiming that the Fed’s asset purchases–QE2–were holding rates down…. So why did he believe all that? It all comes down, I’d argue, to liquidity trap denial. Since 2008 the basic logic of the economic situation has been that the private sector is trying to run a huge surplus, and the public sector isn’t willing to run a corresponding deficit. The result is an economy awash in desired savings with nowhere to go. This in turn means that budget deficits aren’t competing with private borrowing, and therefore need not drive up interest rates. This isn’t hindsight; it’s what I and others have been saying since the very beginning. But a lot of people–politicians, of course, but also a lot of people in finance–have just refused to accept this account. They have clung to the view that budget deficits must lead to higher interest rates. You might think the failure of higher rates to materialize, year after year, would cause them to reasses–indeed, would have caused them to reassess years ago. Instead, however, many of them made excuses. Above all, the big excuse was that rates would have gone higher if only the Fed weren’t buying up the stuff. So QE2 acquired a much bigger role in their thinking than it deserved…. And he was wrong. QE2 ended, and nothing happened to rates.”

• The Pimco Perplex: You can see why I found Gillian Tett’s apologia for Gross–that he was blindsided by central bank intervention–frustrating. For one thing, that’s accepting a model that has failed with flying colors; but beyond that, Gross’s really bad call was almost exactly the opposite, his claim that rates would soar when the Fed’s intervention ended. As I’ve said, Gross of all people shouldn’t have fallen into this trap, since his own chief economist understood liquidity trap logic better than almost anyone. But finance people seem weirdly determined to believe in a macro canon whose hold on their perceptions appears to be completely unbreakable, no matter how much money it causes them to lose.”

• Nobody Could Have Predicted, Bill Gross Edition: “Gillian Tett feels sorry for BIll Gross, who was caught unaware by the sudden shift in bond market behavior. Who could have predicted that interest rates would stay low despite large budget deficits? Um, how about Pimco’s own chief economist, Paul McCulley?… The truth is that the quiescence of interest and inflation rates was predicted by everyone who understood the obvious–that we had entered a liquidity trap–and thought through the implications. I explained it more than five years ago…. And Paul McCulley understood all this really well…. Strikingly, Tett’s version of what went wrong with Gross’s predictions makes no mention of deleveraging and the zero lower bound; it’s all a power play by central banks, which have been ‘intimidating’ bond investors with unconventional monetary policy. This is utterly wrong, and in fact Gross’s own mistakes show that it’s wrong: one of his big failures was betting that rates would spike when the Fed ended QE2, which they predictably didn’t. As an aside, whenever I hear people explaining away the failure of interest rates to spike as the result of those evil central bankers artificially keeping them down, I want to ask how they think that’s possible. Surely the same people, if you had asked them a few years ago about what would happen if the Fed tried to suppress interest rates by massively expanding its balance sheet, would have predicted runaway inflation. That didn’t happen, which should make you wonder what exactly they mean by saying that rates are artificially low. Oh, and Tett ends the piece by citing the Bank for International Settlements as a voice of wisdom. That’s pretty amazing, too; the sadomonetarists of Basel have a remarkable track record of being wrong about everything since 2008, but always finding some reason to call for higher rates. The thing is, Tett is a smart observer who talks to a lot of people in finance; seeing her present a discredited theory as obviously true, without so much as mentioning the kind of analysis that has been worked all along, says bad things about the extent to which anyone who matters has learned anything.”

• Knaves, Fools, and Quantitative Easing: “When the going gets tough, the people losing the argument start whining about civility. I often find myself attacked as someone who believes that anyone with a different opinion is a fool or a knave; as I’ve tried to explain, however, that’s mainly selection bias. I don’t spend much time on areas where reasonable people can disagree, because there are so many important issues where one side really is completely unreasonable…. There are a lot of bad people engaged in economic debate–and I don’t mean that they’re wrong, I mean that they argue in bad faith. Which brings us to today’s installment of oh-yes-they’re-that-bad, courtesy of Bloomberg… the infamous open letter to Ben Bernanke warning that his efforts to boost the economy ‘risk currency debasement and inflation’…. Bloomberg… ask[ed] the signatories whether they would concede that they were wrong. Not a chance…. And this is far from the only example of inflationistas and bond worriers bobbing and weaving, refusing to acknowledge having said what they said, being completely unwilling to admit mistakes. I try hard not to behave that way…. No doubt there have been times when I rewrote history to make myself look better, but I try to avoid that–it’s a major intellectual and moral sin. And boy are there a lot of sinners out there.”

• Ordoarithmetic: “Francesco Saraceno is furious and dismayed at Hans-Werner Sinn, who says among other things that deflation in southern Europe is necessary to restore competitiveness. Why not inflation in Germany, he asks? But Saraceno fails to understand German logic here. As they see it, their economy was in the doldrums at the end of the 1990s; they then cut labor costs, gaining a huge competitive advantage, and began running gigantic trade surpluses. So their recipe for global recovery is for everyone to deflate, gaining a huge competitive advantage, and begin running gigantic trade surpluses. You may think there’s some kind of arithmetic problem here, but in Germany they have their own intellectual tradition.” * Charlatans and Cranks Forever: “Back when Paul Ryan released his first big-splash budget–the one that had the commentariat cooing over its “seriousness”–it included a link to an absurd Heritage Foundation analysis claiming, among other things, that the plan would drive the unemployment rate down to 2.8 percent. (Heritage then tried, unsuccessfully, to send its nonsense down the memory hole and pretend it never happened.) Ryan defenders tried to claim that the plan didn’t actually rely on that Heritage stuff; but as some of us tried to explain, the plan actually didn’t add up, relying on a multi-trillion-dollar magic asterisk on tax receipts. And we predicted that sooner or later Ryan would embrace magical theories about how tax cuts increase revenue. And here we are. One disturbing effect if Republicans take the Senate, by the way, may be that the Congressional Budget Office becomes a purely partisan operation–effectively a department of Heritage.”

And needless to say, Paul Krugman knows what he is talking about. In general:

1. Paul Krugman is right.
2. If you think Paul Krugman is wrong, refer to (1)

Daniel Riera-Crichton et al.: Procyclical and Countercyclical Fiscal Multipliers: Evidence from OECD Countries: “It is not always the case that government spending…

…is going up in recessions…. The ‘true’ long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In extreme recessions, the long-run multiplier reaches 3.1.”

Adam Ozimek: Part-Time Work Is Up Even Among the Self-Employed: “The U.S. unemployment rate…

…is nearing levels normally associated with full employment…. [But] the number of people who say they would rather have full-time jobs and cite economic reasons for why they don’t… rose from around 4 million before the recession to 9 million at its peak, and is now down to around 7 million…. Those favoring structural explanations argue that the increased use of complicated staffing software has allowed firms to be more flexible, and thus to employ more part-timers. Another structural explanation is that higher benefit costs—particularly for healthcare under the Affordable Care Act…. Several factors suggest the rise in involuntary part-time work is cyclical, including the fact that it has occurred across industries and demographics groups…. Even more telling, the same rise in involuntary part-time work has occurred among the self-employed. This can’t be a result of staffing software or a desire to avoid healthcare or other benefit costs…

Antonio Fatas: The permanent scars of fiscal consolidation: “I… look at the actual change in potential output during those years (2010-11)…

…as presented in the April 2014 IMF World Economic Outlook. Comparing this figure to the forecast done back in April 2010, we can calculate for each country the forecast error associated to potential output growth. Most models assume that there should be no correlation between these two numbers. Fiscal consolidations affect output in the short run but not in the long run…. Fiscal consolidations have led to a large change in our views on potential output… around -0.75…. This number is very large and it provides supporting evidence of the arguments made by DeLong and Summers regarding the possibility of fiscal contractions leading to increases in debt via the permanent effects they have on potential output…

Must- and Shall-Reads:

• Rick Perlstein: http://www.thenation.com/blog/174160/eye-pyramids-part-1-how-it-works | | http://www.thenation.com/blog/175349/eye-pyramids-part-3-mlms-and-conservative-republican-infrastructure | http://www.thenation.com/blog/176913/eye-pyramids-part-4-incredible-bread-machine
• Matt Bruenig: The Universal Basic Income As Social Insurance’s Insurance
• Jordi Gali: The Effects of a Money-Financed Fiscal Stimulus
• Nick Bunker: Are the advantages of a college degree declining? – Washington Center for Equitable Growth | How important is the inequality in educational spending on our kids? – Washington Center for Equitable Growth | Who are the top 1 percent and 0.1 percent of income earners? – Washington Center for Equitable Growth | Waiting for wage growth – Washington Center for Equitable Growth

1. Martin Wolf (2012): The German Response: “Mr Ludger Schuknecht: ‘Sir, Martin Wolf… voices a fundamental critique of the European fiscal and economic policy strategy in the context of the current debt crisis. He argues that the “eurozone is now on a journey towards break-­up that Germany shows little will to alter”…. Mr Wolf’s solution for the current problems is risk transfer via eurobonds (of some sort), and demand stimulation via cheaper money and less fiscal consolidation in Germany. But the public and markets have been led to believe in short-­term measures for far too long. And they know there is too much moral hazard already. Eurobonds would only make it worse and the healthier countries–mainly Germany and France–cannot even afford them.’… The aim is not risk transfer, but rather substantially to reduce the problems members of the currency union now have in retaining liquidity in their sovereign bond markets. Mr Schuknecht argues that such multiple equilibria are impossible. There is good reason to believe he is wrong…. I do not know what ‘short-term measures’, Mr Schuknecht is referring to. But the public presumably expects the eurozone at least to hit its inflation target. At present, there is good reason to doubt that it will…. ‘Moral hazard’ is not the clincher Mr Schuknecht believes it is. We have fire brigades, despite moral hazard, because it is bad for the neighbourhood for a house to burn down….. Deep economic collapses are very dangerous. Mr Schuknecht, with his emphasis on the long term, completely ignores these dangers.  If trying to avoid such a dire outcome is ‘short-termism’, so be it. I think of it as trying to find a practical exit from the current trap. Without it, the eurozone may never reach the long term…”

2. Jordi Galí: The effects of a money-financed fiscal stimulus: “The implications for output and inflation of a money-financed fiscal stimulus are highly model-dependent…. When that fiscal intervention is analysed in the context of an ‘idealised’ classical monetary economy with perfect competition in all markets and fully flexible prices and wages, the money-financed fiscal stimulus has a very small effect on output and employment and a huge, frontloaded impact on inflation…. When I deviate from an ideal classical world and use instead a more realistic model allowing for imperfect competition and nominal wage and price rigidities to evaluate the impact of a money-financed fiscal stimulus, the effects are very different… very strong effects on economic activity with relatively mild inflationary consequences spread over several years…a crowding-in of private consumption and investment, caused by the persistently lower real interest rates due to higher expected inflation. The debt-GDP ratio is also predicted to go down over time…”

3. Financial Times: ECB’s Mario Draghi and his misguided malcontents: “Two years ago, Mario Draghi pledged to do ‘whatever it takes’ to save the euro… to use the full monetary policy arsenal to revive the stalling eurozone economy. On Thursday, the European Central Bank president primed his latest weapon…. Yet misguided opposition from inside and outside the bank continues to prevent him firing at will. His colleagues should pass him the ammunition and move out of his way…. The feeble eurozone recovery has stalled. The inflation rate in the currency area is down to 0.3 per cent and the core economies of Germany, France and Italy are at or close to standstill…. Mr Schäuble is not wrong to emphasise the need for structural reform within eurozone economies, but liberalisation and asset purchases are complements…. Reality must at some point impinge upon the monetary theocrats: the threat of outright deflation in the eurozone is not a sign of rising competitiveness–it is a menace…. Since the onset of the eurozone sovereign debt crisis in 2010, the standard pattern has been to do the right thing between six and 18 months too late, the delay generally originating in Frankfurt or Berlin. Now is another opportunity to ditch faulty analysis and wrong-headed policy and arrest deflation before it takes hold. Mr Draghi has shown the right instincts since he took over the ECB presidency. Those critics who have been proved wrong again and again in the eurozone crisis should stop standing in his path.”

4. Ta-Nehisi Coates (2012): We Are All Welfare Queens Now: “Thinking some more on Mitt Romney’s high-handed claim that one in two Americans will vote for Obama simply to better ensure their own sloth, I was reminded of Lee Atwater’s famous explanation of the Southern Strategy: ‘You start out in 1954 by saying, “Nigger, nigger, nigger.” By 1968 you can’t say “nigger”…. So you say… forced busing, states’ rights…. You’re getting so abstract… talking about… economic things and a byproduct of them is [that] blacks get hurt worse than whites…. If it is getting that abstract, and that coded, that we are doing away with the racial problem one way or the other… a hell of a lot more abstract than “Nigger, nigger.”‘… I think what’s often missed in analyzing these tactics is how they, themselves, are evidence of progress and the liberal dream of equal citizenship before the law…. As tactics aimed at suppressing black citizenship become more abstract, they also have the side-effect of enveloping non-blacks…. At each interval the ostensible pariah grows, until one in two Americans are members of the pariah class…. When the party of white populism finds itself writing off half the country, we are really close.”

5. Jared Bernstein: How the Jobless Rate Underestimates the Economy’s Problems: “Why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it’s within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent…. First, there are over seven million involuntary part-time workers… up two percentage points from its pre-recession trough… the unemployment rate doesn’t capture this dimension of slack at all…. Second… participation…. Economists have scurried about trying to figure out how much of the three-percentage-point decline in the labor force participation rate… to attribute to… structural… factors…. Jan Hatzius… another 1.6 million people worth of slack…”

Should Be Aware of:

• Charlie Jane Anders: The Top 100 Star Trek Episodes Of All Time!
• MaxSpeak: For lack of social insurance
• Gnod Laptop Comparison
• Elizabeth Stoker Bruenig: Medieval Insights into Modern Charity

1. Josh Barro: Inflation Hawks’ Views are Independent of Actual Monetary Outcomes: “23 reasonably prominent economists, fund managers, academics and journalists signed a coalition letter opposed to quantitative easing…. The letter warned that it would ‘risk currency debasement and inflation’ and fail to create jobs; as such, they argued, quantitative easing should be ‘reconsidered and discontinued.’ Four years later, inflation is still low (lower even than the 2 percent the Federal Reserve is supposed to be aiming for), unemployment has fallen, economic and job growth has been modest but present, and the stock market has soared. Despite the authors’ insistence that quantitative easing faced ‘broad opposition from other central banks,’ the Bank of England and the Bank of Japan have undertaken similar programs. So… Caleb Melby, Laura Marcinek and Danielle Burger went back to the letter’s signers with a simple question: Have you changed your mind? And pretty uniformly, the signatories said they had…. Ha-ha, I’m just kidding. People who obsess over inflation don’t change their minds…. 14 had the good sense not to comment. The other nine told Bloomberg their views were unchanged…. Their explanations are pretty creative…. Grant… [said] we have had inflation–it just hasn’t shown up in consumer prices…. Holtz-Eakin… explained that the letter was correct because it didn’t set a date… [and] noted that inflation would surely someday exceed 2 percent. Several other signatories similarly rested their arguments on the lack of a date in the letter, and warned that high inflation could still come. Among them is Niall Ferguson, the Harvard history professor, who wrote a 2011 op-ed for Newsweek proclaiming that ‘double-digit inflation is back.’ (It wasn’t.)… I am not surprised…. It’s hard to admit you are wrong–whether you’re Niall Ferguson or Jenny McCarthy.”

2. Steve M.: Rand Paul is an Ebola Truther: “[Rand] Paul thinks it’s a huge mistake to downplay the threat of an epidemic, and believes political correctness is what’s hampering a real discussion from taking place…. ‘It’s an incredibly transmissible disease that everyone is downplaying, saying it’s hard to catch. Well, we have physicians and health workers who are catching it who are completely gloved down and taking every precaution and they’re still getting it.’… Of course, that’s not what’s going on. Here’s the truth: ‘Health care workers in poor nations often do not have enough protective gear to keep them safe from being infected with blood-borne viruses such as Ebola and HIV, a new study shows…. “In many cases, medical staff are at risk because no protective equipment is available–not even gloves and face masks,” the WHO statement added…. In Liberia, only 56 percent of hospitals had protective eyewear for doctors and nurses and only 63 percent had sterile gloves. In Sierra Leone, those figures were 30 percent and 70 percent….’ The mainstream press hates Barack Obama and Hillary Clinton and is just dying to anoint someone, anyone, as the modern, hipster embodiment of a rejuvenated GOP. Rand Paul, with his groovy dudebro libertarianism, is the one the insider journos have pinned the most hopes on. Well, yeah, this Ebola trutherism is hip, but it’s hip the way vaccine skepticism is hip…”

3. Pro-Growth Liberal: Public Infrastructure Investment: IMF v. Mankiw: “Abdul Abiad, David Furceri, and Petia Topalova… sensibly state: ‘Many advanced economies are stuck in a low growth and high unemployment environment, and borrowing costs are low. Increased public infrastructure investment is one of the few remaining policy levers to support growth. In many emerging market and developing economies, infrastructure bottlenecks are putting a brake on how quickly these economies can grow.’ Greg Mankiw responds: ‘The IMF endorses the free-lunch view of infrastructure spending. That is, an IMF study suggests that the expansionary effects are sufficiently large that debt-financed infrastructure spending could reduce the debt-GDP ratio over time. Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts). The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking.’ Did Mankiw miss the memo? We are far below full employment and monetary policy alone has not restored full employment. Even if fiscal stimulus is not self financing, the IMF case is still solid. Funny how times change. Back in 2001 Mankiw was endorsing all sorts of budget busting fiscal stimulus on the grounds that we were below full employment. And back then we were not in a liquidity trap so using monetary policy alone was a more viable option.”

Martin Wolf (2012): The German Response: “Mr Ludger Schuknecht: ‘Sir, Martin Wolf…

…voices a fundamental critique of the European fiscal and economic policy strategy in the context of the current debt crisis. He argues that the “eurozone is now on a journey towards break-­up that Germany shows little will to alter”…. Mr Wolf’s solution for the current problems is risk transfer via eurobonds (of some sort), and demand stimulation via cheaper money and less fiscal consolidation in Germany. But the public and markets have been led to believe in short-­term measures for far too long. And they know there is too much moral hazard already. Eurobonds would only make it worse and the healthier countries–mainly Germany and France–cannot even afford them.’…

The aim is not risk transfer, but rather substantially to reduce the problems members of the currency union now have in retaining liquidity in their sovereign bond markets. Mr Schuknecht argues that such multiple equilibria are impossible. There is good reason to believe he is wrong…. I do not know what ‘short-term measures’, Mr Schuknecht is referring to. But the public presumably expects the eurozone at least to hit its inflation target. At present, there is good reason to doubt that it will….

‘Moral hazard’ is not the clincher Mr Schuknecht believes it is. We have fire brigades, despite moral hazard, because it is bad for the neighbourhood for a house to burn down….. Deep economic collapses are very dangerous. Mr Schuknecht, with his emphasis on the long term, completely ignores these dangers.  If trying to avoid such a dire outcome is ‘short-termism’, so be it. I think of it as trying to find a practical exit from the current trap. Without it, the eurozone may never reach the long term…”