Tag Archives: Paul Krugman

Inflation decreases, and we are screwed

Posted on by at 8:46 pm

Many on the right claim that additional fiscal stimulus is not required and in fact will lead to staggering levels of inflation. But inflation is actually falling in the United States, more than four years after the beginning of our current economic crisis.

The Commerce Department’s price index for personal consumption expenditures, which is the Fed’s favored measure of consumer price inflation, was up 1.5% in June from a year earlier. That’s below the Fed’s 2% goal and also much lower than last year, when inflation measures neared 3% because of surging gasoline prices.

Falling inflation means one thing: lack of sufficient demand. It is what happened in the 1930s in this country, and in Japan in the 1990s. The result in both cases was suffering for the weakest among us.  And it is happening today around the world on a huge scale.

The only reason that we have not had sufficient stimulus (i.e., government spending to plug the hole in demand and return our citizens to work) so as to help address the ruinously high levels of real pain is the intransigence of republicans in the House.

When an economy collapses, particularly when the cause of the collapse is a lack of demand, the only solution is fiscal stimulus, which is the antithesis of austerity.

Many economists argue that a stimulus would be the surefire way to ensure that the economy would regain its footing. Paul Krugman was an early and prominent advocate for a stimulus. He forcefully argued for a big stimulus. Other economists, particularly those of the conservative persuasion, criticized the idea of a big stimulus because they said that it would lead to inflation, hinder rather than facilitate economic recovery, and would spook the bond market, thereby making it more expensive for the U.S. to borrow money. They favored austerity as the best remedy for the ailing economy. Three years later, the verdict is in: Krugman, the Nobel Prize-winning economist, has been vindicated and the critics of the stimulus have been wronged, as none of their predictions had come to fruition

My undergraduate major was economics (albeit 40 years ago) and it was considered “black letter” policy that a demand shortfall was most effectively attacked via government spending to fill the hole of falling demand for goods and services. Despite the rush to so-called conservative values in this country, I continue to believe such is the case.

Hell, even Milton Friedman, the apogee of anti-stimulus, anti-inflation hawk, would have likely favored such action in our current situation.

… Friedman also considered variables other than prices. A characteristic of both the contraction of the 1930s and the Japanese stagnation of the 1990s, he noted, was the drag of tight money on nominal GDP. Reversing this would “have the same effect as always,” he said: “output will grow, and after another delay, inflation will increase moderately.” He grew flexible, as well, concerning money-supply rules. In 1984 he wrote that slow, steady monetary growth was “not a necessary implication of monetarist theory”. And when an economic crash in 1990s Japan gave way to a feeble recovery and deflation, Friedman recommended a monetary “kiss of life” in the form of QE.

Ignoring decades of economic thought and numerous examples around the world, and in the absence of Congressional action, we are left only to the Federal Reserve’s preparation to do what they can. The most effective approach requires Congressional action in the form of increases in government spending over the short term. Here is a cogent explanation of what should happen, from The Economist in June of this year:

I’d LIKE to say a bit more about the policy side of things given the state of the world economy. There is a great deal of attention paid to fiscal issues, and certainly fiscal issues deserve scrutiny. Greece, Ireland, and Portugal have little choice but to embrace swingeing short-term austerity, but massive short-term cuts in places like Spain and Italy are foolish and counterproductive. Maybe Germany and France can’t be talked into substantial fiscal stimulus but, again, focusing fiscal consolidation efforts on the long-term and practicing a sort of benign deficit neglect at this moment of crisis seem the smart options. In America, the fiscal situation is extraordinarily frustrating. Each day, Treasury yields touch unbelievable new lows. It would certainly seem a very good opportunity to undertake, in scale, any capital investments the government has been putting off, and there are many. Congress isn’t doing that, obviously. Instead, paralysis reigns and may produce a massive fiscal contraction at year’s end, on top of which may come a disastrous debt-ceiling battle.

Despite the claims of the so-called deficit hawks, who have been sending up distress signals of impending rampant inflation, borrowing costs of reasonably stable economies like the US and Germany, are at record lows. Stated simply, money is cheap, whether over the short term or the long term. US 10-year Treasury bonds have hit new low yield records several times in the past two weeks.  It is a perfect occasion to borrow money to grow economies over the long term.

But no such stimulus will occur in the United States prior to the election. And this will occur for purely partisan reasons.  The House republicans can, have and will block such action solely to increase the likelihood that Romney will be elected in November as a result of continuing weakness in US employment.

Yet millions of unemployed Americans suffer every day, desperately searching to land a job and support their families, and hundreds of millions around the world suffer as well. Needless suffering is the result.

Shameful.

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Economics quote of the day

Posted on by at 6:42 am

The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come.

This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.

So what does the Fed propose doing about the situation? Almost nothing.

–  Paul Krugman

Economics quote of the day

Posted on by at 9:17 am

What we thought was that Japan was a cautionary tale. It has turned into Japan as almost a role model. They never had as big a slump as we have had. They managed to have growing per capita income through most of what we call their ‘lost decade’. My running joke is that the group of us who were worried about Japan a dozen years ago ought to go to Tokyo and apologise to the emperor. We’ve done worse than they ever did. When people ask: might we become Japan? I say: I wish we could become Japan.

– Paul Krugman (via Andrew Sullivan)

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Political quote of the day

Posted on by at 6:25 am

How did American conservatism end up so detached from, indeed at odds with, facts and rationality? For it was not always thus. After all, that health reform Mr. Romney wants us to forget followed a blueprint originally laid out at the Heritage Foundation!

My short answer is that the long-running con game of economic conservatives and the wealthy supporters they serve finally went bad. For decades the G.O.P. has won elections by appealing to social and racial divisions, only to turn after each victory to deregulation and tax cuts for the wealthy — a process that reached its epitome when George W. Bush won re-election by posing as America’s defender against gay married terrorists, then announced that he had a mandate to privatize Social Security.

Over time, however, this strategy created a base that really believed in all the hokum — and now the party elite has lost control.

– Paul Krugman, reflecting on the dismal slate of republican candidates for president.

Globalization quote of the day

Posted on by at 11:10 am

Such moral outrage is common among the opponents of globalization — of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

But matters are not that simple, and the moral lines are not that clear. In fact, let me make a counter-accusation: The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.

– Paul Krugman, via Daring Fireball.  Keep in mind that Paul Krugman is as liberal as they come. Also note that Krugman won the Nobel Prize for Economics in 2008 based in his work analyzing international trade. It is an area he knows well.

Krugman on low cost labor

Posted on by at 1:31 pm

First of all, even if we could assure the workers in Third World export industries of higher wages and better working conditions, this would do nothing for the peasants, day laborers, scavengers, and so on who make up the bulk of these countries’ populations. At best, forcing developing countries to adhere to our labor standards would create a privileged labor aristocracy, leaving the poor majority no better off.

And it might not even do that. The advantages of established First World industries are still formidable. The only reason developing countries have been able to compete with those industries is their ability to offer employers cheap labor. Deny them that ability, and you might well deny them the prospect of continuing industrial growth, even reverse the growth that has been achieved. And since export-oriented growth, for all its injustice, has been a huge boon for the workers in those nations, anything that curtails that growth is very much against their interests. A policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries.

– Paul Krugman. Much more in this article at Forbes.

Speaking truth to power (updated)

Posted on by at 12:20 pm

The public editor of the New York Times, Arthur Brisbane, has posted a question to the newspaper’s readers:

I’m looking for reader input on whether and when New York Times news reporters should challenge “facts” that are asserted by newsmakers they write about.

One example mentioned recently by a reader: As cited in an Adam Liptak article on the Supreme Court, a court spokeswoman said Clarence Thomas had “misunderstood” a financial disclosure form when he failed to report his wife’s earnings from the Heritage Foundation. The reader thought it not likely that Mr. Thomas “misunderstood,” and instead that he simply chose not to report the information.

Another example: on the campaign trail, Mitt Romney often says President Obama has made speeches “apologizing for America,” a phrase to which Paul Krugman objected in a December 23 column arguing that politics has advanced to the “post-truth” stage.

I find it rather surprising that the Times does not believe that its reporting function should include more than repeating statements and claims from interviews and press releases. Shouldn’t a responsible news producer note clear untruths for readers? Aren’t readers paying to read the “news” and not propaganda? Otherwise, one might as well get one’s news exclusively from press releases. Reporters should not simply be magpies repeating what they hear.

We all remember Judith Miller and her “reports” in the Times during the period leading up to George W. Bush’s invasion of Iraq. She reported exactly what the defense department told her with no skeptical review of the facts regarding, for example, the existence (actually the non-existence) of the purported weapons of mass destruction. It was a horrible and embarrassing episode for the Times and a direct result of not being willing to call a lie a lie. And the Times ended up issuing what was effectively a public apology.

…we have found a number of instances of coverage that was not as rigorous as it should have been. In some cases, information that was controversial then, and seems questionable now, was insufficiently qualified or allowed to stand unchallenged. Looking back, we wish we had been more aggressive in re-examining the claims as new evidence emerged — or failed to emerge.

Update: Today, the Times is busy backing away from Brisbane’s question, and the unwanted responses that it generated. As a sign of how little the Times undertstands its readers, it has even shut down comments on the issue. The Times editor Jill Abramson writes this nonsensical statement:

Of course, some facts are legitimately in dispute.

Right. “Facts” are either true or false. Claims that are in dispute are not facts.

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Political quote of the day

Posted on by at 6:37 am

But since the politics of privatization depend on convincing the public that there is a Social Security crisis, the privatizers have done their best to invent one.

…

There’s no honest way anyone can hold both these positions, but very little about the privatizers’ position is honest. They come to bury Social Security, not to save it. They aren’t sincerely concerned about the possibility that the system will someday fail; they’re disturbed by the system’s historic success.

For Social Security is a government program that works, a demonstration that a modest amount of taxing and spending can make people’s lives better and more secure. And that’s why the right wants to destroy it.

– Paul Krugman, economist and Nobel laureate. (Via Quotation of the Day Mailing List)

The credibility of S&P

Posted on by at 6:48 am

Paul Krugman:

More broadly, the rating agencies have never given us any reason to take their judgments about national solvency seriously. It’s true that defaulting nations were generally downgraded before the event. But in such cases the rating agencies were just following the markets, which had already turned on these problem debtors.

And in those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. Consider, in particular, the case of Japan, which S.& P. downgraded back in 2002. Well, nine years later Japan is still able to borrow freely and cheaply. As of Friday, in fact, the interest rate on Japanese 10-year bonds was just 1 percent.
So there is no reason to take Friday’s downgrade of America seriously. These are the last people whose judgment we should trust.

***

No, what makes America look unreliable isn’t budget math, it’s politics. And please, let’s not have the usual declarations that both sides are at fault. Our problems are almost entirely one-sided — specifically, they’re caused by the rise of an extremist right that is prepared to create repeated crises rather than give an inch on its demands.

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Krugman on the “Deal”

Posted on by at 6:30 am

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.

* * *

Make no mistake about it, what we’re witnessing here is a catastrophe on multiple levels.

– Paul Krugman.  Click here to read the full piece.

Political quote of the day

Posted on by at 6:22 am

So let’s summarize: The economy isn’t fixing itself. Nor are there real obstacles to government action: both the bond vigilantes and structural unemployment exist only in the imaginations of pundits. And if stimulus seems to have failed, it’s because it was never actually tried.

Listening to what supposedly serious people say about the economy, you’d think the problem was “no, we can’t.” But the reality is “no, we won’t.” And every pundit who reinforces that destructive passivity is part of the problem.

– Nobel Prize-winning economist Paul Krugman

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The only way out is through (updated)

Posted on by at 7:34 am

Unemployment in the US is now at 9.2%.  If you include people who want to work, but are working only part time or have given up looking for now, the rate is 16.2%, or about 1 in 6 of all American adults.

Given these grim numbers, three years after the largest collapse of a financial bubble since the Great Depression, there should be calls for a sensible economic response. Such a response would include short-term tax reductions and Federal spending increases, married to long-term debt reduction.  In times of economic collapse, while citizens and business need to retrench and rebuild their balance sheets, the Federal government should increase outlays over the short- and medum-term in order to offset, to the extent possible, the collapse of demand and spending in the private economy.  Deficit reduction could be triggered when unemployment reaches a reasonable (but not perfect level), say, 7.5%.

The stimulus bill early in 2009 was enacted for this purpose and, while the GOP clamors that it “failed,” the fact is that it did preserve and create some jobs, and the current economy is better that would be without that action. If there was a failure, it was that the stimulus was too small.

Paul Krugman in January, 2009:

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

The approach outlined above is Economics 101 and the basic teaching of John Maynard Keynes. [As a side note, it is unfortunate that the overwhelming expenditure of Federal dollars at the time of the collapse went Wall Street and other financial entities who themselves were the fundamental source of the bubble, rather than to truly stimulative spending.]

But instead of calling for increased Federal spending over the short term, the GOP is demanding immediate, substantial cuts in Federal expenditures. And the President is calling for tax increases, along with expenditure cuts. Taken together both the GOP and President are advocating a powerful austerity program, the worst policy approach to address a shortfall in aggregate demand, leading to underperformance of the economy.  Both approaches powerfully reduce demand.

There is one reasonable way out of the morass. Laura Tyson:

There is a logical way out of this policy conundrum: pair temporary fiscal measures targeted at job creation during the next few years with a multiyear, multitrillion-dollar deficit reduction plan that would begin to take effect once the economy is closer to full employment. Pass both now as a package. Current signals from Washington indicate that this way out will be not taken: instead, partisanship and politics will trump logic and premature fiscal contraction will undermine the already anaemic recovery. Even worse, a political stalemate over the debt limit could precipitate a financial crisis…

More from Krugman:

Updated: And lest you believe that fiscal stimulus will cause a spike in inflation and interest rates, take a look at this chart from the Federal Reserve Bank of St. Louis:

As you can see despite the large deficits from 2007 on, and constant harangues from inflation hawks about the purported danger of such deficits, while unemployment remains high, there is no sign whatsoever of surging interest rates (reflecting a lack of inflation). Of course, this should not be surprising given the huge underutilization of our productive resources reflected in the unemployment numbers.  Inflation is cause by too many dollars chasing too few assets. Our country is currently brimming with unused and underutilized assets.  The low interest rates shown also reflect a continuing willingness on the part of international investors and sovereign funds to purchase our Treasury obligations.  Simply stated, despite the deficits and Federal debt, the rest of the world continues to view the US as a safe haven.  (via Paul Krugman)

And there is this from David Leonhardt:

Financial crises have long hangovers, and this one is no exception. Home sales and car sales remain depressed, nowhere near their earlier peaks, even though the population has continued growing. Europe still has the potential to upset global financial markets. If Congress doesn’t act on the debt ceiling soon, so does the United States.

In all kinds of ways — consumer demand, the federal deficit, even the weather — the medium-term future is highly uncertain. But this uncertainty, while the main problem, is not the only problem. We are also committing an unforced economic error. We’re cutting government at the same time that the private sector is cutting.

It is the classic mistake to make after a financial crisis. Hoover and even Roosevelt made a version of it in the 1930s. The Japanese made a version of it in the 1990s. Now we are making it.

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2nd political quote of the day

Posted on by at 10:45 am

It’s important to be clear here about the nature of our sickness. It’s not a general lack of “civility,” the favorite term of pundits who want to wish away fundamental policy disagreements. Politeness may be a virtue, but there’s a big difference between bad manners and calls, explicit or implicit, for violence; insults aren’t the same as incitement.

The point is that there’s room in a democracy for people who ridicule and denounce those who disagree with them; there isn’t any place for eliminationist rhetoric, for suggestions that those on the other side of a debate must be removed from that debate by whatever means necessary.

– Paul Krugman