Posts Tagged ‘Paul Krugman’

17 Mar

We can do this the nice way or the nasty way

Posted by freethinkingeconomist in Economics. Tagged: , , , , .

Paul Krugman has issued a provocative call for a surcharge on Chinese imports, in order to counter the effect of their exchange rate policy, which:

“seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.”

Given that Krugman got his Nobel for trade policy, this is extraordinarily provocative, and has provoked some tit-for-tat with Ryan Avent of the Economist (start it here).   But both of them agree that it is in China’s interests to devalue revalue. Avent writes:

He should respect China enough to know that its leaders understand that RMB appreciation is in their interest.

Whatever clever tricks you can play with monetary policy (and Advent is probably right that the zero-bound need not bind – see also Credit Where It’s Due), it seems preferable that the surplus nations spend to the deficit ones. I agree with Richard Koo on this one: no matter what current or expected future rates are, if you think you have too much debt relative to your assets, you want to save to pay it down.  Models that don’t include the balance-sheet positions are incomplete.  (This is a flaw in my Credit Where It’s Due paper.) Martin Wolf’s passionate column today is all about this, begging the surplus nations to adopt some common-sense.

The balance sheet is a factor that I find Professor Sumner dismisses too easily; he seems not to see how if one part of the economy determinedly pursues savings, then output may fall.  His comment says it all: “Less consumption doesn’t mean less output, just different kinds of output (investment and exports.)”  That seems extraordinarily complacent.  If households save suddenly, why would businesses invest?  If every Western household wants to save, why do exports rise?

I believe that he is similarly misguided when attacking the idea that a remnimbi appreciation may boost US production.  His EconHistory counter-example is Japan; in 1971 Japan had a big surplus.  Its currency has increased in value from 390 to 95 to the dollar.  But it still has a surplus.  Ergo, currency values don’t do the trick.

Scott Sumner is one of the very brightest people writing about anything today, and so this is not aimed at him.  But it strikes me that there are good ways and bad ways of reducing imbalances, and that by altering the terms of trade between two blocks, you can ensure the good way takes place.    To illustrate this, consider these two tables.  They consider two idealised economies: the US signifies deficit nations, and Chermany the surplus.  For simplicity they are the same size.*

and

(the embarassingly crude 30 minute spreadsheets are here)

In the first example, the US starts off spending 80% of its GDP on its own stuff, adn 30% on Chermany’s.  It gradually works this down, by a simple rule (spend 80% of the previous year on US stuff, and a diminishing proportion on Chinese).  The key variables are Chermany’s (it is the dog not the tail).  It is programmed to increase consumption of both by 6% per annum.  As a result of these actions, we get a good equilibrium, with high growth in both areas, and the trade deficit falling.

In the bad way, the Chermans keep their currency at such a level that they consume only 20% of their GDP on US goods.  They grow their own consumption at 4%.  Because Cherman goods remain cheap, the US keeps spending 30% of their GDP on them. Their trade deficit remains high, and growth low.

So observing a continuing trade deficit is no proof at all that the right things have not happened.  That growth between the US and Japan continued for 20 years after 1971 suggests to me that the devaluations were the right thing.  What would have happened if the Japanese had kept their currency at 300 to the $?

In fact, if the bad way had continued, at some point there might have been a crisis – you know, like that 2008 crisis – where the capital being used to support US consumption is withdrawn for some reason.  Then the US might slow its consumption rapidly.  In this scenario, I have it dropping to 75% of GDP on its own stuff, and trending down the Chinese stuff:

As you can see, the US goes into recession, and the Chinese growth slows too.

I’m still on Wolf’s side here.  Where I am not so sure is whether the Chinese understand what is in their interests, as Avent implies.  But I agree with him that ignoring the political ricochets from punitive actions is unwise.  We need to send Wolf over to China, stopping off in Berlin on the way.

*It makes no fundamental difference.

26 Feb

Krugman Profile excerpts

Posted by freethinkingeconomist in Economics. Tagged: .

I thought this piece was beautifully written and interesting.  Here are some bits I found surprising or interesting:

Krugman was buoyed and protected in his youth by an intellectual snobbery so robust that distractions or snobberies of other sorts didn’t stand a chance. “When I was twenty-eight, I wouldn’t have had the time of day for some senator or other,” he says

He was driven mad by Lester Thurow and Robert Reich in particular, both of whom had written books touting a theory that he believed to be nonsense: that America was competing in a global marketplace with other countries in much the same way that corporations competed with one another. In fact, Krugman argued, in a series of contemptuous articles in Foreign Affairs and elsewhere, countries were not at all like corporations. While another country’s success might injure our pride, it would not likely injure our wallets.

He saw that it had been very, very painful during the nineties to get American fiscal policy in order, and he saw all of that being thrown away callously and with very little thought,” Brad DeLong, a professor of economics at Berkeley, says. “And it turned out to be true that Alan Greenspan was going to meetings at the White House saying we’re going to regret this. Paul was simply six years behind those of us who had worked in the Clinton Administration, who found the collapse of reality-based Republicanism coming much earlier.”

And I would love to get this feeling sometime:
Krugman presented his theory to the world in the form of a paper at the National Bureau of Economic Research in July, 1979. “The hour and a half in which I presented that paper was the best ninety minutes of my life,” he wrote later. “There’s a corny scene in the movie ‘Coal Miner’s Daughter,’ in which the young Loretta Lynn performs for the first time in a noisy bar, and little by little everyone gets quiet and starts to listen to her singing. Well, that’s what it felt like: I had, all at once, made it.”
Of the Freshwater crew:

So attached were they to the idea that markets always got things right that some actually suggested that unemployment must be a consequence of workers’ choosing not to work. Saltwater economists were less blinkered in their view of markets and the rationality of investors, Krugman wrote (Larry Summers, a saltwater type, once began a paper on finance by declaring “THERE ARE IDIOTS. Look around”), and had retained a Keynesian view of recessions as crises of insufficient demand. But even saltwater models had no room for such wild imperfections as bubbles and banking-system collapse. “Economists will have to learn to live with messiness,” Krugman concluded.

Anyway, read the whole thing

24 Feb

Some longer pieces

Posted by freethinkingeconomist in Politics. Tagged: , , , , .

Work dominates blogging today, by a wide margin.  Hopefully it will be obvious why, later.

In the meantime, these pieces are half-read or waiting for me to have a moment:

A long profile of Paul Krugman; I have not got far enough to understand why it is called “The Deflationist”

Tim Worstall on the myth of a declining manufacturing sector.  Book mark this one for the next time someone like John Redwood complains about it.

Interview with Gordon Brown in the Economist. Nothing about bullying.  I must admit my views have been slightly hardened against Brown’s team when I read this piece from Sue Cameron about the McBride/Whelan behaviour in the past:

Back in 2005, Mr McB, who started his civil service career in 1996, was the Treasury’s civil service director of communications. GB, then chancellor, was his boss but Whitehall officials are banned from party politics. Yet when Chris Giles, the FT economics editor, wrote about the Tories accusing the government of fiddling some figures, Mr McB did not hesitate to take sides. He e-mailed Mr Giles saying how dare he quote the Tories in this way. He added that unless there was a change of tune, Mr Giles would have no more briefings from the Treasury.

And one of my more admired politicians, Darling, is clearly repressing a lot of anger on this.

I am a saddo who reads books about th 1976 crisis in bed. I was amazed to see Norman Lamont in there, berating the government for its policies.  Here he is questioning their fiscal policies, and the interest rates that result.

David Cameron would have been 10.  Now the FT is doing an extended piece on his pre-MP life.  I had no idea what a machine politician he was, and how deeply embedded:

He worked against the grain of a relentlessly hostile press and a poor economy. At the Treasury, he witnessed his boss face the shock of departure from the exchange rate mechanism on Black Wednesday in 1992. That evening, as Lord Lamont started his statement after a “difficult and turbulent day”, television footage showed a tanned Mr Cameron ambling past in the background, hand in pocket, seemingly unfazed by his boss – and his party – losing its reputation for economic competence. Due, perhaps, to that permanent air of unflappability, Lord Lamont grew increasingly reliant on his assistant

Have fun.

24 Jan

Krugman to the Fed: proof that you can spring the liquidity trap

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , , , .

Ben Bernanke’s reappointment as Chairman of the Federal Reserve Board, once regarded as a sure thing, is now being questioned. Paul Krugman, who has personal reasons for feeling loyal to Bernanke, nevertheless neatly summarises the reasons for being against him.  As Calculated Risk argues, Bernanke supported some of the bubble-ignoring policies that led to the crisis – he even authored with Mark Gertler some of the papers people use to argue for the futility of using asset prices in the central banker’s monetary reaction function.

On the other hand, Time has just made him Person of the Year for his reaction to the financial crisis and ensuing recession.  His writings on the Great Depression formalised an  role for the credit mechanism – ie banks failing – in the propagation of economic shocks – a doctrine that still dismays Tim Congdon, but that the rest of us regard as incredibly important in the light of the *$**!*!%* that the banks have made of the economy this last two years.  Having such a man in charge during the dark days of autumn 2008 may have made a critical difference.

However, that is the past.  I want to focus on another aspect of his job, the one to do with guaranteeing a strong recovery from this slump.  Despite US rates being lower than EU rates for the last 2 years, Bernanke is coming under pressure for worrying more about inflation than unemployment.  As I explain below, such worrying is a critically important ‘act’ of Bernanke’s.  As a result, no less a writer than the Economist’s economics blogger has been asking about ‘his refusal to do his job’:

There is no way to read the Fed’s mandate and not conclude that it is being extremely negligent in failing to take additional actions to assist the economy. The Fed’s only possible defence is that there’s nothing more it can do. I don’t believe this

Krugman’s post makes a similar point:

most important from my point of view, he has seemed deeply worried about defending himself against the inflation hawks, not at all concerned with the question of whether the Fed is doing all it should to fight catastrophically high unemployment.

Given the vast credit operations and low rates, how can Bernanke be accused of doing too little?  Here again I must refer people to Sumner‘s blog.  Monetary policy is not just about the current interest rate. It is not even just about all interest rates, as anyone following quantitative easing must now realise.  It includes everything that financial markets think might happen in the future to do with the price of money and its potential return in the economy.  While the Fed appears to have an influence over just one thing – today’s short term risk free rate – financial markets, businessmen and consumers are asking questions about now, the near future, the long future. * Sending out the wrong signals about what you care about far into the future might stymie economic activity today.

If you think this is just academic, consider the following thought experiment.  What would happen if, as Baseline Scenario called for, Paul Krugman was called to replace Bernanke?  If you think monetary policy is just about the ST rate, then surely nothing much: it can’t go down.  But given Krugman’s well-known left-wing views and oft-repeated concern about unemployment, and disdain for inflation hawks, there would surely be a massive response in the financial markets and the economy.  Future interest rate markets would drop; so would the dollar.  I don’t know about bonds: more growth, more inflation, more QE: these forces can pull apart in odd ways.

In short, surely expectations would take a powerful jolt in the direction of more inflation, and more nominal growth.  That is precisely what a liquidity trap needs: it is what they mean when they call for somone committing to being irresponsible. As you-know-who himself observed.

You can change the entire direction of the future path of the economy, just from a change in which bearded Princeton academic is going to chair some meetings.   It’s not just about an interest rate.

*as the Economist wrote this week about debt, “borrowing that looks cheap today could double in price tomorrow”.  So a current business condition is deeply affected by concerns about a future financial condition.

30 Sep

A short one on quantitative easing

Posted by freethinkingeconomist in Economics. Tagged: , , , , .

Paul Krugman keeps a steady flow of thoughts on the problem of the Zero bound for monetary policy.   The dream for monetarists is that money policy can do all the heavy lifting of restoring aggregate demand in a depressed economy, just by attempting ever more quantitative easing. This means none of that dirty and debt-full fiscal stimulus, which ends up with (warning:  melodramatic Tory formulation about to come) “children being born saddled in debt.”

But unfortunately the size needed and the reliability of pumping more liquidity into the economy in a zero-rate environment is highly questionable. Krugman writes:

But the available — albeit thin — evidence is that it takes a huge expansion of the Fed’s balance sheet to accomplish as much as would be achieved by a quite modest cut in the Fed funds rate. And the Fed isn’t willing to expand its balance sheet to the $10 trillion or so it would take to be as expansionary as it “should” be given, say, a Taylor rule.

Duncan’s take on UK QE seems similar – not really working, particularly for a period of bank-capital-hoarding-stress.

Whereas the effects of fiscal policy are pretty well known and certain: PK, an advocate, thinks they may well be large enough to pay for the costs.  We have the concept of the multiplier to argue with (check out this list, for example)- you may think them modest, but this is a hell of a lot better developed than the long and variable lags of monetary policy at this point.

You can see how this degenerates into a left-right thing.  From the Left, they like the idea that the government’s spending may be the best way out of the ZLB: that way the government gets to direct spending, and it, of course, uses money for good things not bad things. (for a list, read Brown’s speech yesterday.  All, all of it good, of course). For the right, the opposite. For me, this is maddening.  Post-war showed how the notion of a persistently underinvested economy could be misused by governments endlessly trying to achieve full employment with fiscal boosts.  You get inflation.  But the near-Depression was clearly a very different matter.  It takes judgement – surely that should be what economists are paid for – not just spouting the same dogma all the time?

Now the IMF’s just-released report has scrambled my radar on this topic: apparently it sees the banking sector’s funding gap as proof of the need for more QE.  I am not sure I agree.  If our banks were brilliantly capitalised, they could borrow on the global markets; if not, then no amount of UK-grown QE would reach them, because people (investment funds) would not want to lend it to them just because they have it (then, of course, they’re all HMG-guaranteed).

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