Academics From The United States

"I cannot forbear to lengthen an already long paper by adding some remarks about what Paul Krugman calls the "new international economics" (Strategic Trade Policy and the New International Economics, MIT paperback, 1986) and "new trade theory" (in "New Trade Theory and the Less Developed Countries," a paper submitted to the Carlos F. Diaz-Alejandro memorial conference held in Helsinki, August 23-5, 1986). The "new" theory rests on economies of scale. As I told Krugman at Helsinki, I find it a bizarre notion that increasing returns in international trade are new. I developed it at length in my 1953 textbook, based on the 1929 article of John Williams, reprinted in the AEA, "Readings in the Theory of International Trade." Jan Tinbergen developed it in his textbook, International Economic Integration (1954). I recall the joy in Cambridge, Massachusetts, when Kenneth Arrow made increasing returns respectable by formalizing Alfred Marshall's description of long-run decreasing costs historically with his paper on "Learning by Doing," a paper rapidly incorporated into international-trade theory by those who need formal models to understand the intuitively obvious. I confess to some irritation over Krugman's defense of his international-trade theory as new because it offers a well-worn truth in equation form."

"I was just reading an excellent and appropriately approving account of your work. It tells of those who vigorously oppose. My admiration and my personal reward from what you do has no qualification, so it is with all those I wittingly know. Do realize that this is your worthwhile majority and that dissenters are an essential proof of your merit. I should be clear: your column is the best regular reading on economics and politics that I’ve encountered over the last seventy-five years and even a few more."

"Krugman is right about democracy in a sense: Democracy is essentially one big organized act of bullying whereby a larger group bullies a smaller group in order to plunder it with taxes. The “Civil War” proved that whenever a smaller group has finally had enough, and attempts to leave the game, the larger group will resort to anything—even the mass murder of hundreds of thousands and the bombing and burning of entire cities—to get its way. After all, in his first inaugural address Lincoln literally threatened “force,” “invasion,” and “bloodshed” (his exact words) in any state that refused to pay the federal tariff , which had just been more than doubled two days earlier. He followed through with his threat. This is “the kind of nation I believe in,” says Paul Krugman on his blog."

"Critics of Paul Krugman call him acerbic and boastful, unfair on the attack and unwilling to make concessions on the defense, certain that he is correct, and always sure that those who disagree are mendacious or foolish (or both). And I cannot deny that these criticisms are accurate. But all these are outweighed by one fact: he is almost always--not always, but almost always--right. He is the closest thing to an heir to John Maynard Keynes we have today."

"Paul Krugman's attack on Brian Arthur ("The Legend of Arthur") requires a correction of its misrepresentations of fact. Arthur is a reputable and significant scholar whose work is indeed having influence in the field of industrial organization and in particular public policy toward antitrust policy in hightech industries. Krugman admits that he wrote the article because he was "just pissed off," not a very good state for a judicious statement of facts, as his column shows."

"What does Alexandria Ocasio-Cortez know about tax policy? A lot."

"As Branko says, there was a time when Serbs and Croats seemed to get along fairly well, indeed intermarrying at a high rate. But could anyone now put Yugoslavia back together? At this rate, we’ll soon be asking the same question about America."

"It has been obvious for quite a while that Sanders — not just his supporters, not even just his surrogates, but the candidate himself — has a problem both in facing reality and in admitting mistakes."

"I would summarize the Keynesian view in terms of four points:1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond. 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain. 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down. 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses."

"We’re now in the seventh year of a slump brought on by Wall Street excess; the wizardly job of “allocating the economy’s investment resources” consisted, we now know, largely of funneling money into a real estate bubble."

"Sometimes economists in official positions give bad advice; sometimes they give very, very bad advice; and sometimes they work at the OECD."

"We’re living in a Dark Age of macroeconomics. Remember, what defined the Dark Ages wasn’t the fact that they were primitive — the Bronze Age was primitive, too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed."

"Piketty ends Capital in the Twenty-First Century with a call to arms — a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth. It’s easy to be cynical about the prospects for anything of the kind. But surely Piketty’s masterly diagnosis of where we are and where we’re heading makes such a thing considerably more likely. So Capital in the Twenty-First Century is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to."

"Equally important, the financial industry’s political power has not gone away. Banks have waged a fierce campaign against what many expected to be an easily passed reform proposal, the creation of a new agency to protect financial consumers. Despite the steady drumbeat of scandalous revelations—most recently, the discovery that Goldman Sachs helped Greece cook its books, while Lehman cooked its own books—top financial executives continue to have ready access to the corridors of power. And as many have noted, President Obama’s chief economic and financial officials are men closely associated with Clinton-era deregulation and financial triumphalism; they may have revised their views but the continuity remains striking. In that sense, this time really is different: while the first great global financial crisis was followed by major reforms, it’s not clear that anything comparable will happen after the second. And history tells us what will happen if those reforms don’t take place. There will be a resurgence of financial folly, which always flourishes given a chance. And the consequence of that folly will be more and quite possibly worse crises in the years to come."

"What’s odd about Friedman’s absolutism on the virtues of markets and the vices of government is that in his work as an economist’s economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing the role of individual rationality—but unlike some of his colleagues, he knew where to stop. Why didn’t he exhibit the same restraint in his role as a public intellectual? The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy. In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there’s a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I’d argue, is a counter-counterreformation."

"In effect, Japan in the Nineties offered a fresh opportunity to test the views of Friedman and Keynes regarding the effectiveness of monetary policy in depression conditions. And the results clearly supported Keynes’s pessimism rather than Friedman’s optimism."

"One interesting footnote: although Friedman made great strides in macroeconomics by applying the concept of individual rationality, he also knew where to stop. In the 1970s, some economists pushed Friedman’s analysis of inflation even further, arguing that there is no usable trade-off between inflation and unemployment even in the short run, because people will anticipate government actions and build that anticipation, as well as past experience, into their price-setting and wage-bargaining. This doctrine, known as “rational expectations,” swept through much of academic economics. But Friedman never went there."

"Keynes didn’t make an all-out assault on Economic Man, but he often resorted to plausible psychological theorizing rather than careful analysis of what a rational decision-maker would do. Business decisions were driven by “animal spirits,” consumer decisions by a psychological tendency to spend some but not all of any increase in income, wage settlements by a sense of fairness, and so on. But was it really a good idea to diminish the role of Economic Man that much? No, said Friedman, who argued in his 1953 essay “The Methodology of Positive Economics” that economic theories should be judged not by their psychological realism but by their ability to predict behavior. And Friedman’s two greatest triumphs as an economic theorist came from applying the hypothesis of rational behavior to questions other economists had thought beyond its reach."

"Keynesian theory initially prevailed because it did a far better job than classical orthodoxy of making sense of the world around us, and Friedman’s critique of Keynes became so influential largely because he correctly identified Keynesianism’s weak points. And just to be clear: although this essay argues that Friedman was wrong on some issues, and sometimes seemed less than honest with his readers, I regard him as a great economist and a great man."

"If Keynes was Luther, Friedman was Ignatius of Loyola, founder of the Jesuits. And like the Jesuits, Friedman’s followers have acted as a sort of disciplined army of the faithful, spearheading a broad, but incomplete, rollback of Keynesian heresy. By the century’s end, classical economics had regained much though by no means all of its former dominion, and Friedman deserves much of the credit."

"Because the Trump team insisted that a roaring recovery was coming, and refused to notice that it wasn’t happening, we’ve now stumbled into a completely gratuitous economic crisis."

"Republicans Add Insult to Illness"

"The way to deal with China would have been a broad coalition of countries that play by the rules. Instead, we've conveyed the message that big countries don't need no rules. And China is a very big country."

"The [Trump impeachment] inquiry hasn’t found a smoking gun; it has found what amounts to a smoking battery of artillery."

"Nonetheless, William Barr — again, the nation’s chief law enforcement officer, responsible for defending the Constitution — is sounding remarkably like America’s most unhinged religious zealots, the kind of people who insist that we keep experiencing mass murder because schools teach the theory of evolution. Guns don’t kill people — Darwin kills people!"

"With great wealth comes great pettiness."

"Democrats have to figure out why the white working class just voted overwhelmingly against its own economic interests, not pretend that a bit more populism would solve the problem."

"You can’t explain the votes of places like Clay County as a response to disagreements about trade policy. The only way to make sense of what happened is to see the vote as an expression of, well, identity politics — some combination of white resentment at what voters see as favoritism toward nonwhites (even though it isn’t) and anger on the part of the less educated at liberal elites whom they imagine look down on them."

"Nobody can credibly promise to bring the old jobs back; what you can promise — and Mrs. Clinton did — are things like guaranteed health care and higher minimum wages. But working-class whites overwhelmingly voted for politicians who promise to destroy those gains."

"The fact is that Democrats have already been pursuing policies that are much better for the white working class than anything the other party has to offer. Yet this has brought no political reward."

"If the question is when markets will recover, a first-pass answer is never."

"The Sanders campaign has brought out a lot of idealism and energy that the progressive movement needs. It has also, however, brought out a streak of petulant self-righteousness among some supporters. Has it brought out that streak in the candidate, too?"

"Holding people accountable for their past is O.K., but imposing a standard of purity, in which any compromise or misstep makes you the moral equivalent of the bad guys, isn’t. Abraham Lincoln didn’t meet that standard; neither did F.D.R. Nor, for that matter, has Bernie Sanders (think guns)."

"Many liberals have changed their views in response to new evidence. It’s an interesting experience; conservatives should try it some time."

"Things could have been even worse. This week, we managed to avoid driving off a cliff. But we’re still on the road to nowhere."

"I do not think that word “compromise” means what Mr. Ryan thinks it means. Above all, he failed to offer the one thing the White House won’t, can’t bend on: an end to extortion over the debt ceiling. Yet even this ludicrously unbalanced offer was too much for conservative activists, who lambasted Mr. Ryan for basically leaving health reform intact.Does this mean that we’re going to hit the debt ceiling? Quite possibly; nobody really knows, but careful observers are giving no better than even odds that any kind of deal will be reached before the money runs out. Beyond that, however, our current state of dysfunction looks like a chronic condition, not a one-time event. Even if the debt ceiling is raised enough to avoid immediate default, even if the government shutdown is somehow brought to an end, it will only be a temporary reprieve. Conservative activists are simply not willing to give up on the idea of ruling through extortion, and the Obama administration has decided, wisely, that it will not give in to extortion.So how does this end? How does America become governable again?"

"When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right."

"What saved the economy, and the New Deal was the enormous public-works project known as World War II, which finally provided a fiscal stimulus adequate to the economy's needs."

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging."

"Even when political action doesn't backfire, when the movement gets what it wants, the effects are often startlingly malign. For example, could anything be worse than having children work in sweatshops? Alas, yes. In 1993, child workers in Bangladesh were found to be producing clothing for Wal-Mart, and Senator Tom Harkin proposed legislation banning imports from countries employing underage workers. The direct result was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets -- and that a significant number were forced into prostitution. The point is that third-world countries aren't poor because their export workers earn low wages; it's the other way around. Because the countries are poor, even what look to us like bad jobs at bad wages are almost always much better than the alternatives: millions of Mexicans are migrating to the north of the country to take the low-wage export jobs that outrage opponents of Nafta. And those jobs wouldn't exist if the wages were much higher: the same factors that make poor countries poor -- low productivity, bad infrastructure, general social disorganization -- mean that such countries can compete on world markets only if they pay wages much lower than those paid in the West."

"As is often the case with major disputes in economics, the argument over fiscal policy went on for years, with some critics of fiscal policy still defending their position when this book went to press. It seems fair, however, to say that among economists a more or less Keynesian view of the effects of fiscal policy came to prevail. Careful statistical studies at the International Monetary Fund and else where showed that austerity policies have historically been followed by contraction, not expansion. Recent experience, in which countries like Spain and Greece that were forced into severe austerity also experienced severe slumps, seemed to confirm that observation. Furthermore, it was clear that those who had predicted a sharp rise in U.S. interest rates due to budget deficits, leading to conventional crowding out, had been wrong: U.S. long-term interest rates remained near record lows even during the years from 2009 to 2012, when the government ran very large deficits."

"Many of the stories economists tell take the form of models—for whatever else they are, economic models are stories about how the world works."

"We will not achieve the understanding we need, however, unless we are willing to think clearly about our problems and to follow those thoughts wherever they lead. Some people say that our economic problems are structural, with no quick cure available; but I believe that the only important structural obstacles to world prosperity are the obsolete doctrines that clutter the minds of men."

"But this warning was ignored, and there was no move to extend regulation. On the contrary, the spirit of the times—and the ideology of the George W. Bush administration—was deeply antiregulation. This attitude was symbolized by a photo-op held in 2003, in which representatives of the various agencies that play roles in bank oversight used pruning shears and a chainsaw to cut up stacks of regulations. More concretely, the Bush administration used federal power, including obscure powers of the Office of the Comptroller of the Currency, to block state-level efforts to impose some oversight on subprime lending."

"As I’ve just noted, Greenspan warned about irrational exuberance, but he didn’t do anything about it. And in fact, the Fed chairman holds what I believe is a unique record among central bankers: he presided over not one but two enormous asset bubbles, first in stocks, then in housing."

"It is important to realize that even now Fed officials are not quite sure how they pulled this rescue off. At the height of the crisis it seemed entirely possible that cutting interest rates would be entirely ineffectual—after all, if nobody can borrow, what difference does it make what the price would be if they could? And if everyone had believed that the world was coming to an end, their panic might—as in so many other countries—have ended up being a self-fulfilling prophecy. In retrospect Greenspan seemed to have been like a general who rides out in front of his demoralized army waves his sword and shouts encouragement, and somehow turns the tide of battle: well done, but not something you would want to count on working next time."

"Here’s what the IMF did: In Asia (as opposed to Brazil, which as I said was a sort of caricature of the Asian programs) it did not tell countries to defend the values of their currencies at all cost. But it did tell them to raise interest rates, initially to very high levels, in an attempt to persuade investors to keep their money in place. Some vociferous critics of the IMF—most notably Harvard’s Jeffrey Sachs—said that this was very much the wrong thing to do. Sachs believed, in effect, that Asian countries could and should have behaved like Australia, simply letting their currencies decline until they started to look cheap to investors, and that if they had done so, the great slump would never have happened. What the IMF said in response is that Asia is not Australia: that to let the currencies fall unchecked would have led to “hyperdevaluations,” and that the result would have been both massive financial distress (because so many businesses had debt denominated in dollars) and soaring inflation. The trouble with this rationale is, of course, that the massive financial distress happened anyway, thanks to high interest rates and the recession they helped cause. So the IMF at best avoided one vicious circle only by starting another."

"Were the Asian economies more vulnerable to financial panic in 1997 than they had been, say, five or ten years before? Yes, surely—but not because of crony capitalism, or indeed what would usually be considered bad government policies. Rather, they had become more vulnerable partly because they had opened up their financial markets—because they had, in fact, become better free-market economies, not worse. And they had also grown vulnerable because they had taken advantage of their new popularity with international lenders to run up substantial debts to the outside world. These debts intensified the feedback from loss of confidence to financial collapse and back again, making the vicious circle of crisis more intense. It wasn’t that the money was badly spent; some of it was, some of it wasn’t. It was that the new debts, unlike the old ones, were in dollars—and that turned out to be the economies’ undoing."

"Indeed, there has long been a strand of thought that says that moderate inflation may be necessary if monetary policy is to be able to fight recessions. Still, advocates of inflation have had to contend with a deep-seated sense that stable prices are always desirable, that to promote inflation is to create perverse and dangerous incentives. This belief in the importance of price stability is not based on standard economic models—on the contrary, the usual textbook theory, when applied to Japan’s unusual circumstances, points directly to inflation as the natural solution. But conventional economic theory and conventional economic wisdom are not always the same thing—a conflict that would become increasingly apparent as one country after another found itself having to make hard choices in the face of financial crisis."

"In retrospect it is also clear that we gave far too much credit to “Washington,” to the IMF and the Treasury. It was true that they had acted courageously and decisively, and that the results had been a vindication. But on close examination the omens were not all that good for a repeat performance. For one thing, the mobilization of money was achieved through what amounted to a legal sleight of hand, justified mainly by the special significance of Mexico to U.S. interests. Money would not come as quickly or as easily in later crises. The Mexican rescue was also made less complicated by the cooperation of the Mexican government: Zedillo’s people had no pride to swallow—not with Mexico’s history—and were in complete agreement with Washington about what needed to be done. Dealing with Asian countries that had been accustomed to negotiating from a position of strength, and with Asian leaders accustomed to having things their own way, would be very different. Perhaps most of all, we failed to understand the extent to which both Mexico and Washington simply got lucky. The rescue wasn’t really a well-considered plan that addressed the essence of the crisis: it was an emergency injection of cash to a beleaguered government, which did its part by adopting painful measures less because they were clearly related to the economic problems than because by demonstrating the government’s seriousness they might restore market confidence. They succeeded, albeit only after the economy had been punished severely, but there was no good reason to suppose that such a strategy would work the next time."