Morning Crankiness, Nobel Laureates Edition
By Arnold Kling
I am a bit “off” this morning. Ordinarily, my philosophy is “catch them doing something right.” If you try to correct people when they do something wrong, they just take offense, and you accomplish nothing. But, nonetheless:
Nobel Laureate Paul Krugman writes,
If you had told most people, back in 2007, that the federal government would soon be running budget deficits in the vicinity of 10 percent of GDP, most of them would have predicted soaring interest rates…But it hasn’t happened
After all, interest rates are what the liquidity trap is all about.
He could have written the same thing in 1983. Many people predicted that the Reagan deficits would produce soaring interest rates. The deficits appeared, but the 10-year interest rate peaked before the Reagan tax cuts took effect and plummeted in the latter half of 1982, in spite of then-record deficits. (see graph)
Would Krugman say that this proves that we were in a liquidity trap in 1982? I assume he would say “No, of course not,” but he has become such a Johnny one-note on the subject of liquidity traps that I really cannot be sure. He is probably about as far out on a limb on the liquidity trap as I am with PSST, except that he is more insistent than I am that he is right and the rest of the world is wrong.
The way I see it, 2011 is like 1982 in that foreign capital is what is helping to keep interest rates down in the United States. I would call it the “international safe haven trap” if I would call it anything.
When you read the phrase “liquidity trap,” you should think to yourself, “a situation in which it has become impossible for a government to debase its fiat currency.” That should help you to understand why so few of us believe in liquidity traps.
the current White House team is stocked with veterans from the last big budget showdown, so it is at least possible that they know what they are doing.
In his telling, the President is not being passive. He is being passive-aggressive.
I keep going back to the joint press conference of Nobel Laureates Bill Clinton and Barack Obama a few weeks after the 2010 election, where President Obama walked out. There was a memorable photo of President Obama with his back to the camera (and to the press and to the country) as he left the stage. It occurred to me at the time that the message was, “You don’t give me the adulation I have come to expect, so I don’t care about you any more.” What looks to Andrew Leonard like strategy looks to me like somebody pouting in the wake of a blow to his ego.
Finally, Nobel Laureate Michael Spence, along with Sandile Hlatshwayo, writes,
If a relatively open global system is to survive in a world where nation states are the principle decision makers, it will have to be managed and guided not just to achieve efficiency and stability (important as these goals are), but also to ensure that its benefits are distributed equitably between and within countries.
This is the way the vast majority of economists and policy wonks write and think. Note the passive voice “will have to be managed,” which in practice means, “give people like me more power.” They are telling us that we need to make the distribution of economic outcomes more equal, and in order to do that we have to make the distribution of power more unequal.
The widely-unread Unchecked and Unbalanced tries to make the point that people are at least as entitled to worry about inequality in the distribution of political power as they are to worry about inequality in the distribution of wealth.
Thanks to the indispensable Mark Thoma for the various pointers.