Paul Krugman - New York Times Blog
August 24, 2010, 4:56 pm
What About Germany?

Many people are now holding Germany up as proof that austerity is good.

There are a number of reasons that’s foolish, among them the fact that Germany’s austerity policies have not yet begun ― up to this point they’ve actually been quite Keynesian.

But it’s also worth having some perspective on actual German performance to date. Here’s a chart:
DESCRIPTIONEurostat

Everything you’ve been hearing is about that uptick at the end. But I’m not willing to declare an economy that has yet to recover to the pre-crisis level of GDP an economic miracle.

Basically, here’s the German story: it’s an economy that didn’t have a housing bubble, so it wasn’t caught up directly in the bust. But it’s very export-oriented, with a focus on durable manufactured goods. Demand for these goods plunged in the early stages of the crisis ― so that Germany, remarkably, had a bigger GDP decline than the bubble economies ― but has bounced back since summer 2009. This has pulled Germany back up; exports to China have done especially well.

If there’s a slam-dunk argument for austerity in there, it’s remarkably well hidden.

* Add a comment
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 24, 2010, 4:44 pm
Orwell And Social Security

I have to say, after Bush’s Social Security scheme collapsed five years ago, I never thought I’d be back over the same old ground so soon.

But Social Security is actually a key testing ground ― it’s the place where you really see what people are after, and also get a sense of whether they’re at all honest about what they’re trying to do.

So: Pat Toomey supports replacing much of Social Security with a system of private accounts, but denies that this is privatization ― and denounces those who use the term:

I’ve never said I favor privatizing Social Security. It’s a very misleading ― it’s an intentionally misleading term. And it is used by those who try to use it as a pejorative to scare people

Oh, my. Back in the 1990s the Cato Institute had something called The Project on Social Security Privatization, which issued papers like this one from Martin Feldstein: Privatizing Social Security: The $10 Trillion Opportunity.

Then the right discovered that “privatization” polled badly. And suddenly, the term was a liberal plot ― hey, we never said we’d do that.

Wait, it gets worse: Cato not only renamed its project, but it went back through the web site, trying to purge references to privatization. Bush also tried to deny that he had ever used the word. More here.

And here we go again. So remember who originally called privatization privatization: the privatizers, that’s who.

* Comments (3)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 24, 2010, 12:53 pm
2.53

10-year bond rates:
DESCRIPTIONYahoo finance

1. WSJ: The bond vigilantes: the disciplinarians of U.S. policy makers return.

2. Obama goes on Fox News, says that we must reduce the deficit or suffer a double-dip; the rumor is that senior advisers are telling him he must appease the invisible bond vigilantes. Also, Morgan Stanley says that rates will rise to 5.5 in 2010.

3. WSJ: Debt fears send rates up.

NB: the JGB rate is 0.93.

* Comments (51)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 24, 2010, 9:00 am
Yes, $3 Million

I gather that some people are claiming that my numbers in Monday’s column were wrong. They weren’t.

The Tax Policy Center estimates (pdf) say that the budget cost of making all the Bush tax cuts permanent, as opposed to only the middle class cuts, is $680 billion over the next decade. It also says that 55 percent of the benefit flows to 120,000 taxpayers. That’s $374 billion divided by 120,000; TPC expresses it as a per year gain of $310,000, but it is more than $3 million per member of the top .1% over the course of the decade.

So if you are reading some source claiming that I got it all wrong, you have just learned something about that source’s credibility.

* Comments (80)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 24, 2010, 8:14 am
Hangover Theory At The Fed

This Jon Hilsenrath piece on the Fed is an impressive piece of reporting; it seems that somebody is talking out of school. And as Tim Duy says, it’s also depressing for anyone believing, as I do, that we’re sliding steadily into a long-run low-growth, high-unemployment trap, and that aggressive action by the Fed is urgent.

But one more thing struck me: at least some members of the FOMC have bought into the hangover theory ― the modern version of liquidationism in which mass unemployment is somehow necessary in the aftermath of a burst bubble:

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted.

Here’s what Kocherlakota said in a speech after the meeting:

Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.

I tried, in that old piece on hangover theorists, to explain what’s wrong with this view in general. Among other things,

this story bears little resemblance to what actually happens in a recession, when every industry―not just the investment sector―normally contracts.

And this is strikingly true this time around. Kocherlakota would have us believe that there’s a big problem of mismatch because manufacturing is trying to hire, while construction has slumped. But here’s the employment reality:
DESCRIPTIONBureau of Labor Statistics

Manufacturing employment has slumped, not risen ― in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.

Unfortunately, we’re not having an academic discussion here: right now, bad theory ― theory completely at odds with actual experience ― is having a real effect in blocking action.

* Comments (86)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 24, 2010, 7:56 am
AMC’s Credibility Problem

So I Tivoed an episode of AMC’s show Rubicon. As best I can make it out, it’s about a sinister cabal that runs everything, and sends assassination orders via crossword puzzles. That’s completely realistic.

But then it showed the hero catching an Acela from New York to Washington ― at Grand Central Station.

So much for that.

Two updates:

1. I don’t care what the official name is ― I grew up on Lawn Guyland, and everyone calls it Grand Central Station.

2. Yes, I understand why Penn Station was deemed too unphotogenic ― as Vincent Scully said, “One entered the city like a god; one scuttles in now like a rat.” But that’s reality.

* Comments (46)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 23, 2010, 10:42 am
Making It Up

According to Bloomberg, Raghuram Rajan is now getting specific: he wants Bernanke to raise the Fed funds rate by 200 basis points in the face of 9.5 percent unemployment and inflation under 1 percent.

Let me try to explain what bothers me about this sort of thing, aside from the fact that it would be an utter disaster for the economy: it’s the way Rajan ― and many other economists ― seem to be making up new doctrines on the fly to justify their policy prejudices.

I’m all in favor of innovative thinking. But my view is that what you say about policy at any given time should be based on some kind of model ― and furthermore, you should be willing to apply the same model to other situations, not make it a one-off used to justify what you happen to favor right now.

Read more…

* Comments (154)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 22, 2010, 9:59 pm
Who’s Afraid Of The Ratings Agencies?

One thing you sometimes hear is that the game will be up when the ratings agencies downgrade U.S. debt. I wonder how many of the people saying this know that Moody’s and S&P downgraded Japanese debt in 2002, with Moody’s actually putting it below Botswana and Estonia.

And 8 years later, Japan can still borrow at less than 1 percent.

* Comments (64)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 22, 2010, 6:50 pm
Gold Diggers Of 2010

They’ve got a lot of what it takes to get along.

For tomorrow’s column.

* Comments (37)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 22, 2010, 5:02 pm
The Taylor Rule And The “Bond Bubble” (Wonkish)

Here’s a thought for all those insisting that there’s a bond bubble: how unreasonable are current long-term interest rates given current macroeconomic forecasts? I mean, at this point almost everyone expects unemployment to stay high for years to come, and there’s every reason to expect low or even negative inflation for a long time too. Shouldn’t that imply that the Fed will keep short-term rates near zero for a long time? And shouldn’t that, in turn, mean that a low long-term rate is justified too?

So I decided to do a little exercise: what 10-year interest rate would make sense given the CBO projection of unemployment and inflation over the next decade? (CBO also makes interest rate projections ― but you’ll see in a minute why I want to roll my own.)

What we need, first of all, is a Taylor rule. I decided to use the simplified Mankiw rule, which puts the same coefficient on core CPI inflation and unemployment. That is, it says that the Fed funds rate is a linear function of core CPI inflation minus the unemployment rate. Here’s what a scatterplot for 1988-2008 looks like:
DESCRIPTION

Right now, the Mankiw indicator is -8.5 ― core inflation at about 1, unemployment at 9.5. As you can see, that implies a majorly negative interest rate; what we actually get is zero.

Now, take the CBO projection, which calls for unemployment to fall very slowly, and core inflation to stay low for quite a while too. Here’s what it implies for the Fed funds rate, taking the zero lower bound into account:
DESCRIPTION

That’s right: four years of near-zero short-term interest rates. Does a 10-year rate of 2.6 percent still sound so unreasonable? And bear in mind that I’m not using some doomsayer’s forecast; I’m using the staid folks at the CBO.

And just for the heck of it, I asked what interest rate on a 10-year security would yield the same present value as investing in short-term debt at the predicted rates, and rolling it over each year. (Actually, I cheated slightly, because I was getting tired; I considered a bond in which there are no payments along the way, just repayment of accumulated interest and principal in year 10; but I’m pretty sure it doesn’t make much difference).

And the implied interest rate was … 2.6 percent.

Here’s what I think is going on: aside from the obviously intense desire of some of the bond bubble folks to see a fiscal crisis ― they’ve been planning for it, and they’re not going to take no for an answer ― my sense is that a lot of people just can’t bring themselves to face the reality that we’re likely to be in a zero-interest world for a long time. They just keep assuming that the Fed is going to raise rates soon, even though there is absolutely nothing about the macro situation that would justify such a rate increase.

But once again: if you take standard economic forecasts seriously, they point to near-zero short-term rates for a very long time, which in turn justifies low longer-term rates.

Remember Japan.

* Comments (45)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 21, 2010, 2:54 am
Bond Madness

Things are looking bleak for the economy; Goldman Sachs (no link) is predicting that 2nd quarter GDP growth will be revised down to 1.1%, and it’s downhill from here.

Yet from late 2009 until just the other day, all the Very Serious People were mainly concerned about the possibility of surging interest rates. Why?

I was looking back at some of my own notes about what happened last fall. At the time, there was serious consideration among the Obama people of pushing for some kind of second stimulus; what its chances might have been is hard to say. But the point is that they backed off. Why? My understanding is that they bought into the big scare of the time, which was that there was a “carry trade bubble” in the bond market, and terrible things would happen when it burst.

No, this never made sense. Anyone who looked at recent Japanese history should have realized that with a depressed economy, low rates could and did last a very long time.

And some of the scenarios being proposed were just plain bizarre: the bond bubble will burst, and this will plunge us into recession, and the Fed will have to buy up government debt, and this will mean inflation too. Really.

And then the whole story shifted: suddenly it wasn’t the carry trade, it was sovereign debt risks, we’re all Greece.

And now there’s a new one: you see, low interest rates will cause deflation. Really (near the end).

And though the story shifts, the moral is always the same: the little people have to suffer.

* Comments (112)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 20, 2010, 10:57 am
The Power Of Error

So policy makers live in awe of savage priests, who demand that we sacrifice virgins to the invisible gods of the bond market. But what puzzles me is this: why do the priests have such influence? Never mind the victims (we never do); anyone who listened to the priests has lost a lot of money.

A case in point:

Morgan Stanley, the most bearish among the 18 primary dealers that trade government securities with the Federal Reserve, acknowledged that its forecast that Treasury yields would rise this year was misguided.

…

Morgan Stanley had forecast that a strengthening U.S. economy would lead to private credit demand, higher stock prices and diminish the refuge appeal of Treasuries, pushing yields higher. David Greenlaw, chief fixed-income economist at Morgan Stanley, said in December that yields on benchmark 10-year notes would climb about 40 percent to 5.5 percent, the biggest annual increase since 1999. The firm reduced its forecast to 4.5 percent in May and to 3.5 percent last week.

The 10-year note yield fell as much as 4 basis points to 2.53 percent today, the lowest level since March 2009. Yields have declined 10 basis points in the last five days and about 46 basis points in four weeks.

I wrote about this forecast in November 2009, because I believed that such predictions were having a big impact on the Obama administration. And I tried to point out then that the same people confidently declaring that there was a bubble in the bond market completely missed the housing bubble.

And yet these people continue to influence policy.

* Comments (174)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 20, 2010, 2:33 am
Expansionary Austerity?

In today’s column I write about the way fear of invisible bond vigilantes is driving demands for austerity. I didn’t have space to deal with the other part of the austerity cult: the belief that the gods will reward austerity with economic expansion. But it’s equally unfounded in any actual evidence.

In a terrific new working paper, MIke Konczal and Arjun Jayadev look under the hood of an Alesina/Ardagna paper that is being widely cited as evidence that austerity will lead to growth. They look to see how many of the austerity -> growth episodes actually involve fiscal contraction in a slump. Here’s a comprehensive list of those cases:

Ireland 1987

And as I among others have noted, the things that drove Irish expansion ― devaluation, a boom in its largest trading partner, and a sharp fall in interest rates ― have no relevance to the United States today.

All of which goes to remind us with how little wisdom the world is governed.

* Comments (96)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 18, 2010, 12:49 pm
Hej Hej
DESCRIPTION Not likely to attend the conference

I’m off to Sweden, where I’ll be hanging out with tattooed Goth hackers regional scientists. I don’t know how much posting, if any, I’ll be doing.

* Comments (95)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o

August 18, 2010, 12:40 pm
Japanese Bonds

There was a moment last fall when the Obama administration could have pushed for significantly more aid to the economy, with a reasonable chance of getting something through. But the administration balked ― largely, I believe, because it believed warnings that the invisible bond vigilantes were about to strike. And there was a lot of talk at the time about Japan, which was supposedly losing the confidence of investors. As usual, pure speculation was reported as fact:

For jittery investors, Japan’s rising sea of debt is the stuff of nightmares: the possibility of an eventual sovereign debt crisis, where the country would be unable to pay some holders of its bonds, or a destabilizing collapse in the value of the yen.

The only evidence given was a bump up in 10-year bond rates, to a horrifying, um, 1.4 percent. Here’s what has actually happened to those yields since:
DESCRIPTIONBloomberg

Yes, Japanese long-term debt is now yielding less than 1 percent. Oh, and the CDS spread is more or less comparable to other non-Italy G7 countries.

We’re facing a slow-motion catastrophe because policy makers were afraid of the wrong things.

* Comments (58)
*
E-mail This
* Print
* Share Close
o Linkedin
o Digg
o Facebook
o Mixx
o My Space
o Yahoo! Buzz
o Permalink
o