Tag: Paul Krugman

Must-Read: Paul Krugman: Is Our Economists Learning?

Posted on by Brad DeLong

Must-Read: Paul Krugman: Is Our Economists Learning?: “Brad DeLong has an excellent presentation on the sad history of belief in the confidence fairy…

…and its dire effects on policy. One of his themes is the bad behavior of quite a few professional economists, who invented new doctrines on the fly to justify their opposition to stimulus and desire for austerity even in the face of a depression and zero interest rates.vOne quibble: I don’t think Brad makes it clear just how bad the Lucas-type claim that government spending would crowd out private investment even at the zero lower bound really was….

Two things crossed my virtual desk today that reinforce the point about how badly some of my colleagues continue to deal with fiscal policy issues. First, Greg Mankiw has a piece that talks about Alesina-Ardagna on expansionary austerity without mentioning any of the multiple studies refuting their results. And… as @obsoletedogma (Matt O’Brien) notes, he cites a 2002 Blanchard paper skeptical about fiscal stimulus while somehow not mentioning the famous 2013 Blanchard-Leigh paper showing that multipliers are much bigger than the IMF thought.

Second, I see a note from David Folkerts-Landau of Deutsche Bank lambasting the ECB for its easy-money policies, because: “by appointing itself the eurozone’s ‘whatever it takes’ saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation. Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.” Yep. That ‘catharsis’ worked really well when Chancellor Brüning did it, didn’t it?…

[In] the 1970s… stagflation led to a dramatic revision of both macroeconomics and policy doctrine. This time far worse economic events, and predictions by freshwater economists far more at odds with experience than the mistakes of Keynesians in the past, seem to have produced no concessions whatsoever.

Must-Read: Paul Krugman: When Virtue Fails

Posted on by Brad DeLong

Must-Read: Paul Krugman: When Virtue Fails: “There are two narratives about the euro crisis….

…One… shocks happen, and when you establish a common currency without a shared government, you give countries no good way, fiscal or monetary, to respond…. The other narrative, however, favored by Berlin and Brussels, sees the whole thing as the wages of sin. Southern European countries behaved irresponsibly, and now they’re paying the price. What everyone needs to do, they say, is institute a reign of virtue, of fiscal responsibility with structural reform, and all will be well. So it’s important to note that the euro area’s locus of trouble is moving from the south to an arc of northern discomfort–to countries that don’t at all fit the stereotype of lazy southerners…. Finland is the new sick man of Europe. And the Netherlands… is doing slightly better than Italy but significantly worse than France and Portugal….

Finland has been hit by the fall of Nokia and the adverse effect of digital media on newsprint exports. The Dutch are suffering from a burst housing bubble, severe deleveraging, and an extra burden of austerity mania. But the overall point is that when things go wrong there’s no good answer. So maybe the woes of the euro reflect a bad system, not moral failure on the part of troubled nations? Das ist unmöglich!

Must-Read: Paul Krugman: Germany Austerity Policy

Posted on by Brad DeLong

Must-Read: Paul Krugman: Germany Austerity Policy: “Once the bubble burst, there was going to be a difficult time for the Euro, regardless…

…But it’s been far worse than it needed to be and Germany bears some of the responsibility because of turning what should have been viewed as essentially a technical economic problem into a morality play. That has been a very unfortunate story…. Austerity policies have taken what was fundamentally a story about excessive private capital flows and housing bubbles and turned it into lectures of fiscal responsibility that have ended up doing a lot of damage….

Greece was going to have to do a fair amount of austerity but not this much. In the end it would still have been ugly, but not on this level. What could have mitigated the damage? The thing is that what has actually happened has not worked. Greece is still in the Euro. There’s a little bit of economic growth but at the cost of an incredible slump. The ratio of debt to GDP is higher than ever. All of this austerity has not only not resolved the fiscal problem, it hasn’t even moved it in the right direction…

Must-Read: Paul Krugman: Friedman and the Austrians

Posted on by Brad DeLong

Must-Read: Paul Krugman (2013): Friedman and the Austrians: “Still thinking about the Bloomberg Businessweek interview with Rand Paul…

…in which he nominated Milton Friedman’s corpse for Fed chairman. Before learning that Friedman was dead, Paul did concede that he wasn’t an Austrian. But I’ll bet he had no idea about the extent to which Friedman really, really wasn’t an Austrian. In his ‘Comments on the critics’ (of his Monetary Framework) Friedman described the ‘London School (really Austrian) view’

that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by ‘easy money’ policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

and dubbed this view an ‘atrophied and rigid caricature’ of the quantity theory. [His version of the] Chicago School, he claimed, never believed in such nonsense. I have, incidentally, seen attempts [by Larry White and company] to claim that nobody believed this, or at any rate that Hayek never believed this, and that characterizing Hayek as a liquidationist is some kind of liberal libel. This is really a case of who are you gonna believe, me or your lying eyes. Let’s go to the text (pdf), p. 275:

And, if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit expansion. The thing which is needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production to the proportion between the demand for consumers’ goods and the demand for producers’ goods as determined by voluntary saving and spending.

If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into a wrong direction and a definite and lasting adjustment is again postponed. And, even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises. The only way permanently to ‘mobilize’ all available resources is, therefore, not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.

And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come…

If that’s not liquidationism, I’ll eat my structure of production…

http://krugman.blogs.nytimes.com/2013/08/11/friedman-and-the-austrians/?_r=0

Must-read: Paul Krugman: “In Hamilton’s Debt”

Posted on by Brad DeLong

Must-Read: Paul Krugman: In Hamilton’s Debt: “Hamilton’s pathbreaking economic policy manifestoes…

…his 1790 ‘First Report on the Public Credit’… remains amazingly relevant today…. Why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower… give wealthy, influential investors a stake in the new federal government…. Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because:

in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.

That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a ‘national blessing’…. This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global ‘safe asset shortage.’ The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question–and for a variety of reasons, there just aren’t enough such assets these days. As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. And it’s a very persuasive story to just about everyone who has looked hard at the evidence.

Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds…. Alexander Hamilton knew better. Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.

Must-read: Paul Krugman: “Robber Baron Recessions” (Competition Policy)

Posted on by Brad DeLong

Must-Read: A few words on judicial doctrine, economic thinking, and political economy…

Back when Robert Bork in his The Antitrust Paradox proposed large-scale rewriting of laws from the bench to privilege “economic efficiency” above all of the other somewhat-conflicting goals of our competition policy and so bring order to a disordered piece of the law, I saw it as neutral-to-good. But the default judicial judgment of any merger then became:

  1. It must reduce costs via economies of scale
  2. It is not inefficient unless it reduces the quantity supplied–and companies these days are so clever at price discrimination that they can still find a way to serve those low-value consumers whose willingness-to-pay is only a little bit larger than monopoly cost.

And the government faced a very steep Sisyphean uphill boulder-rolling to rebut those presumptive judgments and block, well, block much of anything.

And it has turned out that, in practice, both (1) and (2) have been largely wrong…

Paul Krugman: Robber Baron Recessions: “Profits are at near-record highs…

…Suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power… [with] corporations… able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service…. Such an economy… would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short….

Do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies, including one just released by the White House…. The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan… [who] didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement….

Still, better late than never. On Friday the White House issued an executive order directing federal agencies to use whatever authority they have to ‘promote competition.’… For we aren’t just living in a second Gilded Age, we’re also living in a second robber baron era. And only one party seems bothered by either of those observations.

Must-read: Paul Krugman: “Robber Baron Recessions”

Posted on by Brad DeLong

Must-Read: But… but… but…

Is this the wrong graph somehow?:

FRED Graph FRED St Louis Fed

Yes, investment spending is weak relative to its past business-cycle peak values. But all of the relative weakness is in residential construction:

FRED Graph FRED St Louis Fed

You can say that business investment should be even stronger–high profits, high profit margins, depressed wage costs mean that capital’s complement labor is cheap, very low financing costs (if you can borrow risk-free). But business investment is also a function of capacity utilization, and you would not expect it to be high in a low-pressure economy, especially one in which confidence is low that the trend growth of nominal GDP will be sustained.

Why is this the wrong graph?

Paul Krugman: Robber Baron Recessions: “Profits are at near-record highs…

…thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before….

Suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power… [with] corporations… able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service… an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.

And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to ‘secular stagnation’ — that awkwardly-named but serious condition…. If that sounds to you like the story of the U.S. economy since the 1990s, join the club.

Must-read: Paul Krugman (2013): “Friedman and the Austrians”

Posted on by Brad DeLong

Must-Read: Paul Krugman (2013): Friedman and the Austrians: “Still thinking about the Bloomberg Businessweek interview with Rand Paul…

…in which he nominated Milton Friedman’s corpse for Fed chairman. Before learning that Friedman was dead, Paul did concede that he wasn’t an Austrian. But I’ll bet he had no idea about the extent to which Friedman really, really wasn’t an Austrian. In his ‘Comments on the critics’ (of his Monetary Framework) Friedman described the ‘London School (really Austrian) view’

that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by ‘easy money’ policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

and dubbed this view an ‘atrophied and rigid caricature’ of the quantity theory. [His version of the] Chicago School, he claimed, never believed in such nonsense. I have, incidentally, seen attempts [by Larry White and company] to claim that nobody believed this, or at any rate that Hayek never believed this, and that characterizing Hayek as a liquidationist is some kind of liberal libel. This is really a case of who are you gonna believe, me or your lying eyes. Let’s go to the text (pdf), p. 275:

And, if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit expansion. The thing which is needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production to the proportion between the demand for consumers’ goods and the demand for producers’ goods as determined by voluntary saving and spending.

If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into a wrong direction and a definite and lasting adjustment is again postponed. And, even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises. The only way permanently to ‘mobilize’ all available resources is, therefore, not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.

And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come…

If that’s not liquidationism, I’ll eat my structure of production…

More musings on the fall of the house of Uncle Milton…

Posted on by Brad DeLong

This, from Paul Krugman, strikes me as… inadequate:

Paul Krugman: Why Monetarism Failed: “Right-wingers insisted–Friedman taught them to insist–that government intervention was always bad, always made things worse…

…Monetarism added the clause, ‘except for monetary expansion to fight recessions.’ Sooner or later gold bugs and Austrians, with their pure message, were going to write that escape clause out of the acceptable doctrine. So we have the most likely non-Trump GOP nominee calling for a gold standard, and the chairman of Ways and Means demanding that the Fed abandon its concerns about unemployment and focus only on controlling the never-materializing threat of inflation.

What about the reformicons, who pushed for neo-monetarism? We can sum up their fate in two words: Marco Rubio. There is no home for the kind of return to realism they were seeking…. The monetarist idea no longer serves any useful purpose, intellectually or politically. Hicksian macro–IS-LM or something like it–remains an extremely useful tool of both analysis and policy formulation; that tool is not helped by trying to state it in terms of monetary velocity and all that. And if you want macro policy that isn’t dictated by Ayn Rand logic, you have to turn to a Democrat; on the other side, there’s nobody rational to talk to.

Sad!

This is an issue I have worried at like a dog at a worn-out glove for a decade now. So let me worry at it again:

There were gold bugs and Austrians in the 1950s, 1960s, 1970s, and even 1980s too. But Arthur Burns, Milton Friedman, Alan Greenspan and company kicked them up and down the street with gay abandon. And the Ordoliberal Germans would, when you cornered them, would admit that somebody else had to take on the job of stabilizing aggregate demand for the North Atlantic economy as a whole for their doctrines to work.

But in 2009 the Lucases and the Prescotts and the Cochranes and the Famas and the Boldrins and the Levines and the Steils and the Taylors and all the others and even the Zingaleses (but we can excuse Luigi on the grounds that if you are (a) Italian and (b) view Berlusconi as the modal politician a certain reluctance to engage in fiscal policy is understandable)–crawled out from their caves and stood in the light of day. And the few remaining students of Milton Friedman got as little respect as the Stewards of Gondor gave to the leaders of the Dunedain.

Yes, there is an intellectual tension between believing in laissez faire as a rule and believing in activist monetary management to set the market interest rate equal to the Wicksellian neutral interest rate. But why is that tension unsustainable? Once you have swallowed a government that assigns property rights, sustains contracts, and enforces weights and measures, why is this extra step a bridge too far?