Tag Archives: Paul Krugman

Decisions, Decisions

Posted on by

Our mail-in ballots arrived today. I’m wondering if I should vote for the candidate who’s a decent person with a substantial record of government service? Or his opponent, a horrible person with a history of deceit and fraud? Further down the ballot, should I vote for candidates who will help the next president achieve his goals or the ones who will do everything possible to make him fail? Hmm.

One reason to vote for Biden and members of his party is that, despite what many think, Democratic presidents have a better record on the economy than Republican presidents. Paul Krugman of the City University of New York and the New York Times explains:

[On Monday night], Joe Biden claimed that his tax and spending plans would create millions of jobs and promote economic growth. Txxxx claimed that they would destroy the economy.

Well, everything we know suggests that Biden was right and Txxxx wrong. And I’m not the only one saying this. Nonpartisan analysts like Moody’s Analytics and the not-exactly-socialist economists at Goldman Sachs are remarkably high on Biden’s proposals. . . .

There’s a widespread perception that Republicans are better than Democrats at managing the economy. But that’s not at all what the record says.

Yes, Ronald Reagan presided over a long economic expansion; but so did Bill Clinton, and the Clinton boom was both longer and bigger. The economy did in fact add many jobs under Txxxx before the coronavirus struck, but this simply represented the continuation of an expansion that began under Barack Obama.

And those were the good stretches. Both Bushes presided over really poor economic performance.

Republicans also have a long history of claiming that progressive policies would lead to economic disaster. They’ve been wrong every time.

They’ve been wrong about tax hikes: When Clinton raised taxes in 1993, Republicans confidently predicted recession, but what actually happened was a huge boom. When California raised taxes under Jerry Brown, the right called it “economic suicide”; again, the economy boomed.

They’ve also been wrong about social programs. Obamacare, the G.O.P. insisted, would destroy millions of jobs. One of the dozens of attempts to repeal the Affordable Care Act was actually called the “Repealing the Job-Killing Health Care Law Act.” Yet in the six years after January 2014, when the act went into full effect, the economy added almost 15 million jobs.

And let’s not forget the flip side, the many, many times Republicans promised that cutting taxes on the rich would produce an economic miracle, promises that never came true. There’s a reason conservatives still go on and on about the Reagan boom, all those years ago; it’s the only example they have that even seems to support their economic ideology. (It doesn’t, but that’s another topic.)

But there’s a difference between saying that progressive policies are not the disaster conservatives claim and saying that Biden’s plan would actually promote growth. Why are Moody’s and Goldman Sachs so high on his proposals? Why do I share that optimism?

First, the background. Even before the coronavirus, good employment numbers could hide underlying economic weakness. For at least the past decade, we’ve been living in a world of excess savings: the amount the private sector saves persistently exceeds the amount it spends on real investments. This savings glut is reflected in low interest rates, even when the economy is strong.

Low interest rates, in turn, limit the ability of the Federal Reserve to fight downturns, which is why Jerome Powell, the Fed’s chairman, has been pleading for more fiscal stimulus.

In today’s world, then, we actually want the government to run budget deficits, because they put excess savings to use. But we also want those deficits to be productive — to boost investment, and strengthen the economy in the long run.

The 2017 Txxxx tax cut flunked that test. It increased the budget deficit, but the main driver of that red ink — a huge cut in corporate taxes — utterly failed to yield the promised surge in business investment.

Biden’s plan would roll back that corporate tax cut, replacing it with spending programs likely to yield much more bang for the buck. In particular, much of the spending would be on infrastructure and education — that is, outlays aimed at strengthening the economy in the long run, as well as boosting it over the next few years.

When Moody’s ran this program through their model, it concluded that by the end of 2024, real gross domestic product would be 4.5 percent higher than under a continuation of Txxxx’s policies, translating into an additional 7 million jobs. Goldman Sach’s estimates are similar: a 3.7 percent gain in G.D.P.

Now, a model is only a model, and economists’ predictions are often wrong (although some of us are willing to acknowledge error and learn from our mistakes).

But if you’re trying to assess the candidates’ economic claims, you should know that Txxxx’s predictions of a Biden bust lack credibility, not just because Txxxx lies about everything, but because Republicans always predict disaster from progressive policy, and have never yet been right.

And you should also know that Biden’s assertions that his plan would give the economy a significant boost are well grounded in mainstream economics and supported by independent, nonpartisan analyses. . . .

Unquote.

There’s a simple reason why Democrats do better. They believe in sharing the wealth. Republicans don’t.

Hmm. I think we should go with the Democrats.

Mysteries

Posted on by

I did something I usually don’t do, which is look at one of those articles about rural or suburban voters in the Midwest who voted for Txxxx and will do it again (“Txxxx supporters still support Txxxx!”). Everything he said was about how he’s doing personally. His farm is doing well. The pandemic is mostly far away. He expressed no concern about anybody else and made inane excuses for the president (e.g. it’s so unfair that the news media report all this bad news — they’re purposefully ignoring the good things (?) the president does).

Fortunately, however, the thrust of the article was that Txxxx will do worse in Iowa than four years ago and possibly lose the state.

Along with the mystery of why anyone would vote for such a terrible person and president, there’s the mystery of why the stock market is doing so well. Paul Krugman helps answer that question and warns of darker times ahead:

On Tuesday, the S&P 500 stock index hit a record high. The next day, Apple became the first U.S. company in history to be valued at more than $2 trillion. Dxxxx Txxxx is, of course, touting the stock market as proof that the economy has recovered from the coronavirus; too bad about those 173,000 dead Americans, but as he says, “It is what it is.”

But the economy probably doesn’t feel so great to the millions of workers who still haven’t gotten their jobs back and who have just seen their unemployment benefits slashed. The $600 a week supplemental benefit enacted in March has expired, and Txxxx’s purported replacement is basically a sick joke.

Even before the aid cutoff, the number of parents reporting that they were having trouble giving their children enough to eat was rising rapidly. That number will surely soar in the next few weeks. And we’re also about to see a huge wave of evictions, both because families are no longer getting the money they need to pay rent and because a temporary ban on evictions, like supplemental unemployment benefits, has just expired.

But how can there be such a disconnect between rising stocks and growing misery? Wall Street types, who do love their letter games, are talking about a “K-shaped recovery”: rising stock valuations and individual wealth at the top, falling incomes and deepening pain at the bottom. But that’s a description, not an explanation. What’s going on?

The first thing to note is that the real economy, as opposed to the financial markets, is still in terrible shape. The Federal Reserve Bank of New York’s weekly economic index suggests that the economy, although off its low point a few months ago, is still more deeply depressed than it was at any point during the recession that followed the 2008 financial crisis.

And this time around, job losses are concentrated among lower-paid workers — that is, precisely those Americans without the financial resources to ride out bad times.

What about stocks? The truths is that stock prices have never been closely tied to the state of the economy. As an old economists’ joke has it, the market has predicted nine of the last five recessions.

Stocks do get hit by financial crises, like the disruptions that followed the fall of Lehman Brothers in September 2008 and the brief freeze in credit markets back in March. Otherwise, stock prices are pretty disconnected from things like jobs or even G.D.P. [the Gross Domestic Product] [although the market does quickly, sometimes violently respond to the latest earnings reports].

And these days, the disconnect is even greater than usual.

For the recent rise in the market has been largely driven by a small number of technology giants. And the market values of these companies have very little to do with their current profits, let alone the state of the economy in general. . . .

Take the example of Apple, with its $2 trillion valuation. Apple has a price-earnings ratio — the ratio of its market valuation to its profits — of about 33. [The historical P.E. ratio for the stock market is around 15.] As long as they expect Apple to be profitable years from now, they barely care what will happen to the U.S. economy over the next few quarters.

Furthermore, the profits people expect Apple to make years from now loom especially large because, after all, where else are they going to put their money? Yields on U.S. government bonds, for example, are well below the expected rate of inflation.

And Apple’s valuation is actually less extreme than the valuations of other tech giants, like Amazon or Netflix. . . .

[Prof. Krugman left out another well-known factor helping the stock market (a factor he understands very well). That’s FOMO (fear of missing out). When stocks go up, it’s natural that people want to own stocks. The stock market is, among other things, a giant casino. When some gamblers are having a great time, other gamblers want to join in the fun.]

Unfortunately, ordinary Americans get very little of their income from capital gains, and can’t live on rosy projections about their future prospects. Telling your landlord not to worry about your current inability to pay rent, because you’ll surely have a great job five years from now, will get you nowhere — or, more accurately, will get you kicked out of your apartment and put on the street.

So here’s the current state of America: Unemployment is still extremely high, largely because Txxxx and his allies first refused to take the coronavirus seriously, then pushed for an early reopening in a nation that met none of the conditions for resuming business as usual — and even now refuse to get firmly behind basic protective strategies like widespread mask requirements.

Despite this epic failure, the unemployed were kept afloat for months by federal aid, which helped avert both humanitarian and economic catastrophe. But now the aid has been cut off, with Txxxx and allies as unserious about the looming economic disaster as they were about the looming epidemiological disaster.

So everything suggests that even if the pandemic subsides — which is by no means guaranteed — we’re about to see a huge surge in national misery.

Oh, and stocks are up. . . . 

A Comment, a Column, and Carnage

Posted on by

“There isn’t any iceberg. There was an iceberg but it’s in a totally different ocean. The iceberg is in this ocean but it will melt very soon. There is an iceberg but we didn’t hit the iceberg. We hit the iceberg, but the damage will be repaired very shortly. The iceberg is a Chinese iceberg. We are taking on water but every passenger who wants a lifeboat can get a lifeboat, and they are beautiful lifeboats. Look, passengers need to ask nicely for the lifeboats if they want them. We don’t have any lifeboats, we’re not lifeboat distributors. Passengers should have planned for icebergs and brought their own lifeboats. I really don’t think we need that many lifeboats and they’re supposed to be our lifeboats, not the passenger’s lifeboats. The lifeboats were left on shore by the last captain of this ship. Nobody could have foreseen this iceberg.”

Someone calling themselves “Citizen” submitted that comment after reading Paul Krugman’s latest column in The New York Times. Krugman wrote:

“I don’t know about you, but I’m feeling more and more as if we’re all trapped on the Titanic — except that this time around the captain is a madman who insists on steering straight for the iceberg. And his crew is too cowardly to contradict him, let alone mutiny to save the passengers.

A month ago it was still possible to hope that the push by Dxxxx Txxxx and the Txxxxist governors of Sunbelt states to relax social distancing and reopen businesses like restaurants and bars — even though we met none of the criteria for doing so safely — wouldn’t have completely catastrophic results.

At this point, however, it’s clear that everything the experts warned was likely to happen, is happening. Daily new cases of Covid-19 are running two and a half times as high as in early June, and rising fast. Hospitals in early-reopening states are under terrible pressure. National death totals are still declining thanks to falling fatalities in the Northeast, but they’re rising in the Sunbelt, and the worst is surely yet to come.

A normal president and a normal political party would be horrified by this turn of events. They would realize that they made a bad call and that it was time for a major course correction; they would start taking warnings from health experts seriously.

But Txxxx, who began his presidency with a lurid, fact-challenged rant about “American carnage,” [is] doubling down on his rejection of expertise, this week demanding full reopening of schools in defiance of existing guidelines……

Until early 2020, Txxxx led a charmed political life. All his recent predecessors had to deal with some kind of external challenge during their first three years…..But Trump inherited a nation at peace and in the middle of a long economic expansion that continued, with no visible change in the trend, after he took office.

Then came Covid-19. Another president might have seen the pandemic as a crisis to be dealt with. But that thought never seems to have crossed Txxxx’s mind. Instead, he has spent the past five months trying to will us back to where we were in February, when he was sitting on top of a moving train and pretending that he was driving it.”

Unquote.

After hearing Txxxx speak at his inauguration, former president George W. Bush remarked, “Well, that was some weird shit”. When — not if — Joe Biden becomes president in January, Txxxx’s story about American carnage will have come true.

Debt, Schmet

Posted on by

The Nobel Prize in economics that Prof. Paul Krugman won isn’t technically a Nobel Prize, since it’s not one of the prizes Alfred Nobel created back in 1905. Krugman’s “Nobel Prize” (not “Noble Prize”) was actually the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, established in 1968 by a donation from Sweden’s central bank to the Nobel Foundation.

Nonetheless, Krugman is very smart and knows a lot about economics. From his New York Times newsletter:

I get a lot of hate mail; in fact, I worry if a column doesn’t generate a big backlash, because it suggests that I may have been off my game. But it’s interesting to see what generates the most hate. In general, writing “Donald Trump is a terrible person” gets a sort of collective shrug…The real vitriol tends to come over monetary and fiscal policy.

In particular, I don’t think anything I’ve written has angered as many people as my declaration five years ago that debt is money we owe to ourselves — a point I naïvely imagined would be self-evident once people thought about it. But it turns out that challenging the notion that government borrowing imposes a burden on our children and grandchildren deeply offends many people, even though that notion makes very little sense.

So I don’t really expect people to be persuaded when I say that the response to Covid-19 is a near-perfect demonstration of my point. But let’s give it a try, anyway.

Here’s where we are right now. To contain the coronavirus, we’ve effectively shut down a significant part of the economy. Around 10 percent of U.S. workers are or were employed in “leisure and hospitality,” which has basically been locked down; even more are employed in retail trade, much of which has also been locked down.

For those of us still drawing a paycheck, this is annoying but not much more than that; I dream of coffee shops and concerts, but those aren’t necessities. For those who made a living by providing banned services, however, the lockdown is a financial catastrophe.

So we’re providing disaster relief on a huge scale: unemployment insurance, aid to small businesses and more. It’s still inadequate, and a lot of the money still isn’t making it to the people who need it most. But put that on one side, and ask: How are we paying for it?

The immediate answer is that the federal government is borrowing the money. New projections from the Congressional Budget Office suggest that federal debt, as a share of G.D.P., will be around 30 points higher by the end of next year than it was at the end of 2019.

But who will that money be owed to? The answer is, me — and people like me. That is, those who are still receiving more or less their normal incomes are spending less and saving more — yes, we’re buying more groceries and booze, but that’s vastly outweighed by reduced spending on restaurants and vacations. And those savings are, one way or another, being recycled via the federal government into aid for those less fortunate.

Some of the recycling is direct: My wife and I have, in fact, bought some U.S. government bonds. Most of it is indirect: You put more money in your bank account, the bank accumulates extra reserves in its account at the Federal Reserve, and the Fed buys government bonds. But the details aren’t especially important. At a fundamental level, the government is helping one group of Americans by borrowing from another group of Americans.

You might ask how the money will be repaid; actually, the odds are that it never will be repaid, which is OK but that’s a story for another time. There are also potential problems created by a high level of federal debt, although to be honest it’s unlikely that U.S. debt will be a real problem any time soon.

The key point for now, however, is that this debt-financed disaster relief isn’t coming at the expense of America’s future growth; it’s not making the country poorer, and it’s not cheating future generations. The debt we’re incurring now is money we owe to ourselves.

Unquote.

Krugman knows, of course, that some of America’s debt is owed to foreign countries, but it’s less than most people think.

As of this month, U.S. federal debt is $24 trillion. One quarter of that or $6 trillion is called “intragovernmental” debt. It’s money that’s owed by U.S. government agencies to other U.S. agencies. For example, the Social Security administration owns half of the $6 trillion (because Social Security invests its excess cash in U.S. government bonds).

The other $18 billion of U.S. debt is called “public” debt. Two-thirds of it or $12 trillion is owned by Americans, either individuals, companies or other entities. Foreigners own the other third or $6 trillion.

Krugman would be more precise, therefore, if he said that 75% of the government’s debt is money we owe ourselves. Foreigners are owed 25%.

For more on debt from Prof. Krugman:

America came out of World War II with huge debts — and experienced an unprecedented economic boom.

Britain emerged from World War II with debt of 270 percent of G.D.P. It never paid that debt off — but the ratio of debt to G.D.P. fell 80 percent over the next generation anyway.

This Matters, Although It’s Not the Only Thing

Posted on by

From Paul Krugman in the NY Times:

“Wednesday’s Democratic debate was far more informative than previous debates. What we learned, in particular, was that as a presidential candidate, Michael Bloomberg is a great businessman — and that Elizabeth Warren remains a force to be reckoned with.

Both lessons ran very much counter to the narrative that the news media has been telling in recent weeks. On one side, there has been a palpable eagerness on the part of some news organizations and many pundits to elevate Bloomberg; on the other side, complaints by Warren supporters about her “erasure” from news coverage and polling aren’t wrong.

What does all this mean for the nomination? I have no idea. But maybe the Warren-Bloomberg confrontation will help refocus discussion away from so-called Medicare for all — which isn’t going to be enacted, no matter who wins — to an issue where it matters a lot which Democrat prevails. Namely, are we going to do anything to rein in the financialization of the U.S. economy?

During the U.S. economy’s greatest generation — the era of rapid, broadly shared growth that followed World War II — Wall Street was a fairly peripheral part of the picture. When people thought about business leaders, they thought about people running companies that actually made things, not people who got rich through wheeling and dealing.

But that all changed in the 1980s, largely thanks to financial deregulation. Suddenly the big bucks came from buying and selling companies as opposed to running them.

In many cases, these financial deals saddled companies with crippling levels of debt, often ending in bankruptcy and job destruction — a process that continues to this day. There was also an epidemic of financial fraud and racketeering, exemplified by the career of Michael Milken, the junk-bond king Donald Trump just pardoned.

And the financial sector itself doubled as a share of the economy, which meant that it was pulling lots of capital and many smart people away from productive activities.

For there is no evidence that Wall Street’s mega-expansion made the rest of the economy more efficient. On the contrary, growth in family incomes slowed down as finance rose — although a few people became immensely rich. And the runaway growth of finance set the stage for the worst economic crisis since the Great Depression.

It also made Michael Bloomberg a billionaire.

Now, I wasn’t being sarcastic in calling Bloomberg a great businessman. He is. And to his credit, he himself hasn’t, as far as I know, engaged in destructive financial wheeling and dealing. Instead, he got rich by selling equipment to destructive wheeler-dealers.

For those who don’t know what I’m talking about, I’m referring to the famous Bloomberg Terminal, a proprietary computer system that gives subscribers real-time access to large quantities of financial data. This access is incredibly expensive — a subscription costs around $24,000 a year. But it’s a must-have in the financial industry, because traders with Bloomberg Terminals can react to market events a few minutes faster than those without.

It’s an extremely profitable business. But is it good for the economy? No.

After all, does getting financial information a few minutes earlier do anything significant to improve real-world business decisions that affect jobs and productivity? Surely not. Bloomberg has, in effect, made his billions off a financial arms race that costs vast sums but leaves everyone pretty much back where they started.

Which brings me to Elizabeth Warren.

Warren stumbled badly, making herself a long shot for the nomination, by trying to appease supporters of Bernie Sanders. She endorsed proposals for radical health care reform that have almost no chance of becoming reality, and she was raked over the coals about paying for those proposals even though Sanders himself has offered few clues about his own plans.

But before all that, Warren had made a name for herself as a crusader against financial industry fraud and excess.

It wasn’t just talk. One key piece of the reforms instituted after the 2008 financial crisis, the creation of the Consumer Financial Protection Bureau, was Warren’s brainchild. Furthermore, by all accounts the bureau was wildly successful, saving ordinary families billions, until the Trump administration set about eviscerating it.

And here’s the thing: Financial reform, unlike health care, is an area in which it might make a big difference which Democrat becomes president. It’s true that other candidates — including Bloomberg! — have endorsed Warren-type reforms. But it is, I think, fair to ask how committed they would be in practice, and also whether they would squander their political capital on unwinnable fights, which is my big concern about Sanders.

Again, aside from the clear damage to Bloomberg, I have no idea how or if Wednesday’s debate will affect the Democratic race. But it may have helped remind Democrats that corruption, fraud and the excesses of Wall Street in particular can be potent political issues — especially against a president who is both personally corrupt and so obviously a friend to fraudsters.”

Unquote.

The title of Professor Krugman’s column is “Warren, Bloomberg and What Really Matters”. I’m sure he’d agree that issues like climate change and poverty really matter too, but he makes an excellent point that relates to Warren’s fundamental message: we will only make progress on things that really matter if we make our democracy stronger and address the corruption in Washington.

Those were the goals of the first bill the House Democrats passed in 2019, H. R. 1, a bill “to expand Americans’ access to the ballot box, reduce the influence of big money in politics and strengthen ethics rules for public servants”. They are also the goals at the top of the list of plans on Warren’s site: “End Washington corruption and fix our democracy”.

Little will get done unless we fix and enforce the rules. After we elect enough people who want to.