Grasping Reality on TypePad, by Brad DeLong

I think Paul Krugman is wrong today on international trade. For we find him in “plague on both your houses” mode. On the one hand:

Paul Krugman: Trade and Tribulation and A Protectionist Moment?: “Protectionists almost always exaggerate the adverse effects of trade liberalization…

…Globalization is only one of several factors behind rising income inequality, and trade agreements are, in turn, only one factor in globalization. Trade deficits have been an important cause of the decline in U.S. manufacturing employment since 2000, but that decline began much earlier. And even our trade deficits are mainly a result of factors other than trade policy, like a strong dollar buoyed by global capital looking for a safe haven.

At the zero lower bound on safe nominal short-term interest rates, an expansionary fiscal policy impetus of d percent of current GDP will:

1. raise current output by (μ)d,
2. raise future output by (φμ)d, and
3. raise the debt to GDP ratio by a proportional amount ΔD = (1 - μτ - μφ)d,

where μ is the Keynesian multiplier, τ is the tax rate, and φ is the hysteresis coefficient.

Barack Obama promised his supporters that he would run a government not for Blue States or Red States but for the United States. And to that end Obama has attempted to adopt:

• John McCain's global-warming policy,
• Mitt Romney's healthcare policy,
• George H.W. Bush's foreign policy,
• Bill Clinton's tax policy,
• Ben Bernanke's preferred fiscal policy--and
• kept Ben Bernanke on at the Fed to run monetary policy--while
• continuing the George W. Bush/Henry Paulson banking- and housing-crisis policy.

Thoroughly centrist governance.

Thoroughly technocratic governance.

And yet the execrable Josh Kraushaar claims that the radical-left policies of the Kenyan Muslim Socialist have driven the Republican Party justifiably mad...

Ezra Klein delivers the proper smackdown:

Ezra Klein: Obamacare didn’t pave the way for Donald Trump. The GOP’s response to it did: "Political Twitter fell all over itself mocking this article [by Josh Kraushaar] blaming Al Franken for the rise of Donald Trump...

I have learned an immense amount for Gerald Friedman, and I will always be extremely grateful to him for being one of the two people who thought so highly of my undergraduate thesis to think it deserved a summa.

But.

Arguing that Bernie Sanders's policies are likely to produce a 5.3%/year real GDP growth rate is not just wrong--not just likely to read to false conclusions about the likely impacts of the policies--but further opens the gates of hell for the likes of Arthur Laffer and John Cochrane to dance around and get their garbage into the press.

We had held the line, with no economists of note and reputation except Hubbard, Mankiw, Cogan, Feldstein, and Cochrane daring to endorse JEB!!'s 4%/year growth forecast--and with the press overwhelmingly treating it as the joke that it is. This kind of thing puts that limited but real victory in danger.

So line me up with Paul--and with Laura, Austen, Christina and Alan here:

Paul Krugman: Worried Wonks: "I’ve tweeted this out, but want to point out that this is a pretty big deal...

With Bill Clinton, or Bill Bradley, or Al Gore, or Barack Obama, or Lloyd Bentsen, or Hillary Rodham Clinton--you listen to them, or you talk to them, and you know there is a mind back there deeply knowledgeable about and wrestling with substantive issues of societal welfare and technocratic policy.

Larry Summers presents as an example of his contention that we know more than is in our models--that our models are more a filing system, and more a way of efficiently conveying part of what we know, than they are an idea-generating mechanism--Paul Krugman's Mundell-Fleming lecture, and its contention that floating exchange-rate countries that can borrow in their own currency should not fear capital flight in a liquidity trap. He points to Olivier Blanchard et al.'s empirical finding that capital outflows do indeed appear to be not expansionary but contractionary:

Larry Summers: Thoughts on Delong and Krugman Blogs: "I think the issue is more on the supply side than the demand side...

...If I believed strongly in the vertical long run Phillips curve with a NAIRU around five percent and in inflation expectations responsiveness to a heated up labor market, I would see a reasonable case for the monetary tightening that has taken place. I am sure Paul and Brad are right that a desire to be ‘sound’ also influences policy.  I am not nearly as hostile to this as Paul. I think maintaining confidence is an important part of the art of policy.

Over at Equitable Growth: So as I finish my Pre-Federal Reserve Interest-Rate Liftoff Lollapalooza, I am left with three conclusions:

1. Paul Krugman and Larry Summers are such amazing f#@$*%$ geniuses...
2. If I simply wiped my brain, and reprogrammed the left half with Paul and the right half with Larry, I would be so much smarter than I am...
3. Their influence on low-theory, analysis, and policy is immense, yet somehow... not big enough...

I confess that back when I somehow found myself taking point on the internet for the Larry-Summers-for-Fed-Chair movement, I thought that the choice between Janet and Larry had the potential to be a big deal if we wound up in the tails--that Larry might break the committee so that it could not act when it needed to, and Janet might fail to act in the absence of consensus when it need to act. But I did not think it would be a big deal anywhere near the center of the distribution.

Yet here we are in the center of the distribution, and somehow the difference the choice has made feels... substantial. Larry the Dove...

Here's the whole lollapalooza: READ MOAR

Over at Equitable Growth: I am, once again, struck by just how much smarter the economics profession as a whole would have been over the past sixteen years if only people had taken as their lodestone this paper: Paul Krugman (1999): Thinking about the liquidity trap

Wherever I look at the post-2007 discussion in macroeconomics, I see enormous literatures and subliteratures, all of them containing a great deal of verbose and confused argument, all of them eventually leading to conclusions that were... laid out with diamond-like clarity in single paragraphs in Krugman (1999): READ MOAR

Over at Equitable Growth: Larry Summers: What Should the Fed Do and Have Done?: "The Federal Reserve... has strongly signaled that it will raise rates...

...Given the strength of the signals that have been sent it would be credibility-destroying not to carry through with the rate increase, so there is no interesting discussion to be had about what should be done on Wednesday...

This seems to me to be wrong: credibility that one will stubbornly pursue bad policies is not worth gaining, or preserving. READ MOAR

Over at Equitable Growth: Olivier Blanchard, at least, has said that the secular decline in global real interest rates and increased macro instability means that the 2%/year inflation target was greatly ill-advised and needs to be raised to 4%/year. But, among the great and good who staff the finance ministries, central banks, and international organizations these days, he is nearly alone. And the other pieces of the policy puzzle that might get us out of our zero-lower-bound-secular-stagnation pickle--aggressive redistribution via taxes and transfers, higher debt levels for reserve currency-issuing sovereigns with exorbitant privilege to boost the supply of safe assets, reducing risk premia by governments' assumption of the role of entrepreneurial risk-bearer of last resort, international organizations that emerging markets regard as friends rather than enemies--are nowheresville. READ MOAR