Princeton economist Paul Krugman has written a longish essay for the New York Review of Books. This is classic Krugman. Ostensibly, Krugman is reviewing three books, but the essay is much more than this. (more…)
Posts Tagged ‘Paul Krugman’
Via Mark Thoma (EconomistsView), here is Paul Krugman espousing the Keynesian view that fiscal stimulus is necessary to stimulate an economy caught in a liquidity trap, with low interest rates and low expected inflation.
As I see it, the whole structural/classical/Austrian/supply-side/whatever side of this debate basically believes that the problem lies in the labor market. …. For some reason, they would argue, wages are too high….
As regular readers know, I find this prima facie absurd ….
So what’s the alternative view? It’s basically the notion that the interest rate is wrong — that given the overhang of debt and other factors depressing private demand, real interest rates would have to be deeply negative to match desired saving with desired investment at full employment. And real rates can’t go that negative because expected inflation is low and nominal rates can’t go below zero: we’re in a liquidity trap. ….
There are strong policy implications of these two views. If you think the problem is that wages are too high, your solution is that we need to meaner to workers — cut off their unemployment insurance, make them hungry by cutting off food stamps, so they have no alternative to do whatever it takes to get jobs, and wages fall. If you think the problem is the zero lower bound on interest rates, you think that this kind of solution wouldn’t just be cruel, it would make the economy worse, both because cutting workers’ incomes would reduce demand and because deflation would increase the burden of debt.
What my side of the debate would call for, instead, is a reduction in the real interest rate, if possible, by raising expected inflation; and failing that, more government spending to increase demand and put idle resources to work. …. [emphasis added]
Paul Krugman, “The Price Is Wrong“, The Conscience of a Liberal, New York Times blog, 30 March 2013.
This was standard textbook economics decades ago when I studied macroeconomics. If I had read this yesterday – instead of today – I would have agreed completely with Krugman. Now, I have to confess that I was never a good student of macroeconomics. The theory never made much sense to me. But last night I listened to a podcast of Bentley University economist Scott Sumner, which opened my eyes. This shows that it is never too late for an old economist to learn new tricks. I now realize that, unless a central bank is totally incompetent, Krugman is wrong.
Note that Krugman states that it is optimal to use monetary policy when interest rates are at or near the zero lower bound, because increasing inflationary expectations will cause the real – inflation adjusted – interest rate to fall. Only “failing that”, does he call for “more government spending to increase demand and put idle resources to work”.
Now, suppose the central bank is not incompetent, but only targets inflation, and wants to keep it low. This implies that the central bank will tighten monetary policy to offset any fiscal stimulus. Only if the Central Bank does not know how to change inflationary expectations (and that is not difficult to do!), will fiscal stimulus work.
For a clearer explanation, listen to the Sumner podcast. Here is a portion of the podcast highlights, beginning after minute 49:36:
Guest: [D]uring normal times, when interest rates are positive, almost all mainstream macroeconomists agree that monetary policy is the proper tool for stabilizing the economy, not fiscal policy. …. [T]hat part is not controversial. Here’s where it gets controversial: When interest rates fall to zero, is there once again an argument for using fiscal stimulus? Paul Krugman and others say yes. Now, at zero interest rates there’s a powerful argument for using fiscal stimulus because monetary policy is ineffective. However, Paul Krugman and others also say: Well, monetary policy actually could do a lot more if the Fed were really willing to be more aggressive; but they are just too conservative to do the things they really need to do. Therefore we need fiscal stimulus. And my response to the Keynesians is: Then you are sort of arguing for fiscal stimulus on the basis of incompetent monetary policy. Which is defensible. But if you look more closely at the Fed and ask in what way are they incompetent, they are not incompetent in the right way in my view to make fiscal stimulus work. Let me explain that.
Russ: Fiscal or monetary?
Guest: Fiscal. In other words, what I talk about is what’s called a ‘monetary offset.’ The easiest way to see this is if fiscal stimulus really did boost aggregate demand, it would raise inflation. At least a little bit. Now, if the Fed is targeting inflation it will just tighten monetary policy to offset that. It will prevent inflation from rising and it will thwart the intentions of the fiscal stimulus. So, in order to make fiscal stimulus work, you need an incompetent central bank [emphasis added]. You need one that isn’t effectively targeting inflation. …. And instead just sort of passively lets fiscal stimulus move inflation up and down according to the whim of Congress. But I would argue that this vision the Keynesians have of monetary policy becoming passive at a zero interest rate is simply flat out wrong. Yes, the Fed has been too cautious; they’ve been too conservative to promote recovery that both Krugman and I would have liked to see. But they’ve been passive in a very specific way. …. [T]his year a lot of Keynesians said: Now we’ve had these tax increases; now the economy is really going to slow, because our models say that’s a fiscal austerity. And at the beginning of the year I said no, probably GDP is going to grow just as fast in 2013 as in 2012, even though they’ve raised the payroll tax and they’ve raised taxes on the rich and they’ve cut some spending recently.
Russ: Sort of.
Guest: The spending is debatable. But there’s no question at the end of 2012 they did enough fiscal tightening, according to the Keynesian models, to knock about 1.5 points off GDP. That was at least what I’d been seeing in the Keynesian articles. Now, we’ll see how it plays out. But it wouldn’t surprise me at all if GDP is just as strong this year as last year, because the Fed’s actions, which were taken partly to offset this Fiscal Cliff, will essentially neutralize the effect of it. …. In fact, recently I’ve seen some articles suggesting growth is even picking up a little bit in the last few months. Which is exactly the opposite of what should have happened if the fiscal austerity model was correct. So, no, I don’t think fiscal policy has an effect because I think the Fed neutralizes it. They have their own target.
“Sumner on Money, Business Cycles, and Monetary Policy“, hosted by Russ Roberts, EconTalk, 25 March 2013.
The full podcast is about 70 minutes in length. Listen to all of it, and become enlightened.
Via Mark Thoma, Paul Krugman urges President Obama to refrain from increasing the age of eligibility for US Medicare, which is now set at age 65, because “those [younger] seniors would face sharply higher out-of-pocket costs”.
But what, ask the deficit scolds, do people like me propose doing about rising spending? The answer is to do what every other advanced country does, and make a serious effort to rein in health care costs. Give Medicare the ability to bargain over drug prices. Let the Independent Payment Advisory Board, created as part of Obamacare to help Medicare control costs, do its job instead of crying “death panels.” (And isn’t it odd that the same people who demagogue attempts to help Medicare save money are eager to throw millions of people out of the program altogether?)
Mark Thoma, “Paul Krugman: Life, Death and Deficits“, Economist’s View, 16 November 2012.
I agree. The age of eligibility should go down, not up. How far down? Well, how about to the age of eligibility in effect for Medicare in Canada. That age is a nice round number: zero, null, naught. In Canada, Medicare is present from birth to death. And, there are no co-payments! Can’t the US, which is as wealthy a country as Canada, do the same for its citizens and taxpayers?
Medicare is a popular programme, even with Tea Party activists. So, why monkey around with Obamacare, which is a huge gift to the insurance companies. It would be far better to simply expand Medicare’s coverage to include everyone, young and old alike. One small change would be necessary. Medicare would have to be funded from general government revenue rather than payroll taxes, because children will not have paid the requisite ten years of Medicare taxes.
Even Hong Kong, that hotbed of free market liberalism, provides nearly free health care for permanent residents of all ages. (A very small, token co-payment is collected from each patient.)
I am not linking directly to Paul Krugman’s blog because it is gated by the New York Times, which, unlike the Financial Times, counts accessing a blog as equivalent to accessing a column from the print edition.
Mitt Romney is catching a lot of flack from his own side now, which seems premature; although the odds are now against him, this is by no means over. But let me say that even if he does spend election night weeping in his car elevator, his critics from the right are being unfair. Yes, he’s a pretty bad candidate — but the core problem is with his party, not with him.
Paul Krugman, “Sympathy For The Doofus“, The Conscience of a Liberal, 24 September 2012.
HT Scott Sumner
FT columnist Samuel Brittan reviews Krugman’s latest book, and – with two reservations – likes the message.
The remedy for too little spending is more spending. Everything else is commentary.
This is the moral I draw from Paul Krugman’s End This Depression Now! ….
It is difficult to imagine Mr Krugman cheering for the Republicans. Nevertheless I cannot sufficiently emphasise that there is nothing essentially “leftwing” about his analysis. ….
There is nothing new about the hostility of conventional opinion to the Krugman message. Keynes faced similar hostility when he tried to rescue capitalism from the Depression. He regarded his General Theory as “moderately conservative in its implications” and consistent with an economy run on private enterprise principles. ….
Mr Krugman’s thesis … should be read on the basis of its evidence, not on its alleged ideological baggage.
Samuel Brittan, “You don’t need to be a lefty to support Krugman“, Financial Times, 8 June 2012.
Sir Samuel, one of Margaret Thatcher’s favourite economists, is definitely not a ‘lefty’. His reservations are in the full column, available ungated at the link above.
[Paul] Krugman, 59, most hated and most admired columnist in the US, rumpled and professorial, is sitting at a small table in the middle of the restaurant, working on his laptop. It is Thursday and he is writing his column. What, I ask, is it on? “It’s going to be Europe,” he replies. “Partly because it is coming to a head, partly because I am a little overstretched and that’s what I’m ready for. So I’m going to do that one.” I understand the feeling of being overstretched: Krugman is writing two columns a week, posting regularly on his blog, writing popular books and teaching.
Martin Wolf, “Lunch with the FT: Paul Krugman“, Financial Times, 26 May 2012.
Paul Krugman and Robin Wells, in a recent essay, expand on their thesis that rising income inequality can explain why governments in general – and the US government in particular – chose to respond to the current financial crisis with policies of austerity rather than stimulus.
In 2008 we suddenly found ourselves living in a Keynesian world …. By that we mean that we found ourselves in a world in which lack of sufficient demand had become the key economic problem, and in which narrow technocratic solutions, like cuts in the Federal Reserve’s interest rate target, were not adequate to that situation. To deal effectively with the crisis, we needed more activist government policies, in the form both of temporary spending to support employment and efforts to reduce the overhang of mortgage debt.
One might think that these solutions could still be considered technocratic …. Keynes himself described his theory as “moderately conservative in its implications,” consistent with an economy run on the principles of private enterprise. From the beginning, however, political conservatives — and especially those most concerned with defending the position of the wealthy — have fiercely opposed Keynesian ideas. ….
Why such animus against … a “moderately conservative” message? Part of the answer seems to be that even though the government intervention called for by Keynesian economics is modest and targeted, conservatives have always seen it as the thin edge of the wedge: concede that the government can play a useful role in fighting slumps, and the next thing you know we’ll be living under socialism. ….
What seems very clear to us … is that rising inequality played a central role in causing an ineffective response once crisis hit. Inequality bred a polarized political system, in which the right went all out to block any and all efforts by a modestly liberal president to do something about job creation.
Paul Krugman and Robin Wells, “Economy killers: Inequality and GOP ignorance“, Salon, 15 April 2012.
Excerpted from The Occupy Handbook edited by Janet Byrne (Little, Brown and Co., 2012).
Daron Acemoglu and James Robinson, co-authors of Why Nations Fail (2012), find this to be a ‘curious thesis’.
Krugman and Wells … [argue] that the “right” (the GOP) opposes any government intervention, and Keynesian fiscal policies and work programs that would have increased employment and combatted the recession are opposed by the right because, with increased inequality, they have become more beholden to the very wealthy.
Though intriguing, this idea is not backed up with direct evidence by Krugman and Wells. It may well be true, but it is also a curious thesis. Here are some of the things we find less than fully clear about this thesis.
First, the distinction between “right” and “left” (or perhaps pro-elite and anti-elite) is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics. Both Fascist Italy and Nazi Germany were big-time Keynesians. ….
Second, … in most societies, even in the supposedly laissez-faire 19th century Britain, elites work very hard to make the government intervene in the economy — of course, in a very specific way, to support them. ….
Third, … it is not clear why the wealthiest Americans should be opposed to Keynesian policies. After all, wealthy Americans are … strongly vested in the US corporate sector, which would also be one of the main beneficiaries of expanded aggregate demand. ….
Having said all of that, Krugman and Wells are probably right to some degree. Republicans prevented more aggressive Keynesian measures, and this has likely contributed to the persistence of very high unemployment …. All the same, the reasons for this hostility to Keynesian economics are still mysterious.
Daron Acemoglu and James Robinson, “Inequality and Keynesian Economics“, Why Nations Fail Blog, 18 April 2012.
I doubt that Krugman and Wells would disagree. Krugman and Wells, after all, never claim that conservatives are pursuing short-term self-interest when they oppose Keynesian ideas. In fact, they hint that conservative opposition might be ideological, an unjustified fear that Keynesian policies could lead to socialism and redistribution of wealth.
Robin Harding, US Economics Editor for the Financial Times, has written a mixed review of Paul Krugman’s book End this Depression Now! (Norton, 2012).
Krugman’s basic argument runs like this. Millions of unemployed are suffering at terrible social cost in the US because the economy lacks demand. The government can create demand by spending; the Fed can create demand by cutting interest rates. There is minimal reason to fear that more spending will cause a debt crisis in the US. Therefore, the authorities should get on with it already, and end this depression now.
You can argue otherwise, and some economists do, but most evidence from the last few years suggests that Krugman is basically right. If high unemployment was structural then inflation would have started to go up by now. US Treasury bond yields have gone down even as US debt has risen. A preponderance of studies show that, when interest rates are stuck at zero, government spending has a large effect on the economy.
Krugman spends 11 chapters running through what is wrong with the US economy and the eurozone …. But what he actually wants is … fairly modest, and not entirely convincing as a programme to end a depression now. ….
The caution of his own proposals … suggests that he knows how hard it will be to lure them [governments] back into the depression-ending business.
Robin Harding, “Austerity bites: Why the US government should get on with more spending“, Financial Times, 12 May 2012.
KRUGMAN: Obama is very much an establishment sort of guy. The whole image of him as a transcendent figure was based on style rather than substance. If you actually looked at what he said, not how he said it, he said very establishment things. …. He was talking about Social Security cuts during the 2008 primary. That’s how you sound serious in our current political culture. He wasn’t sufficiently distanced to step back and say that a lot of our political culture is completely insane.
PLAYBOY: Of the three main political candidates in the 2008 primaries, Hillary Clinton and John Edwards had more progressive plans on health care than Obama.
KRUGMAN: Right. And we might notice that the really big debate, which was furious and screaming, was about whether we needed a mandate on health care reform. And the answer is of course we did. Obama was just wrong and, I have to say, demagoguing a bit during the primary by pretending you wouldn’t need it and by using that as a stick with which to beat Hillary. A lot of people who were normally like me didn’t like me because I was saying, “Obama’s really not the progressive you think he is.” And now they’re all saying, “He’s not the progressive we thought he was.” He came in prepared with the wrong set of instincts, and it’s taken a while to get past that.
Jonathan Tasini, “Interview: Paul Krugman“, Playboy, 16 February 2012.
This lengthy interview is interesting throughout. I assume that Princeton economist Paul Krugman needs no introduction.
Berkeley economist Christina Romer writes that there is no convincing reason for the United States government to single out its manufacturing sector for special treatment.
Everyone seems to be talking about a crisis in manufacturing. Workers, business leaders and politicians lament the decline of this traditionally central part of the American economy. President Obama, in his State of the Union address, singled out manufacturing for special tax breaks and support. Many go further, by urging trade restrictions or direct government investment in promising industries.
A successful argument for a government manufacturing policy has to go beyond the feeling that it’s better to produce “real things” than services. American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada. ….
As an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.
Christina D. Romer, “Economic View: Do Manufacturers Need Special Treatment?“, New York Times, 5 February 2012.
Christina Romer was the chairwoman of President Obama’s Council of Economic Advisers. Read the entire column. It is excellent. I have excerpted only the first two paragraphs, and the conclusion.
Especially interesting to me was Ms Romer’s opinion that the benefits from clusters of manufacturing plants “while real, may often be small”. Paul Krugman, in contrast, emphasizes the importance of industrial clustering. See, for example, the paper he wrote two years ago for a meeting of the Association of American Geographers, or his recent defence of the auto bailout.