Master of Noance

I understand that Paul Krugman is very busy as a globetrotting econopundit and teacher, so I can see why he skims. But he surely must know, having been a writer for the New York Times for a decade that that editors pick provocative titles that are sure to catch eyes. Today, Krugman takes aim at a Miles Kimball article on Quartz, here is the title:

What Paul Krugman Got Wrong About Italy’s Economy

Ouch. Especially because the original title was “How Italy and the UK Can Stimulate Their Economies Without Further Damaging Their Credit Ratings”. Krugman may still not be impressed with the Reinhart, Reinhart, and Rogoff study (and neither am I, more on that at the end), but he should have still acknowledged in his post today that Kimball is actually on his side in this debate, and has some genuinely good ideas!

Krugman is wrong to write that expansion of Italian fiscal policy is the answer to Italy, absent a commitment by the ECB to a higher level of NGDP growth in the Eurozone as a whole. Without ECB support, fiscal policy in any Eurozone country will fail to revive the robust nominal growth needed for countries to return to their trend level of nominal spending, and simply leave them further in debt. A lot of commentary (Krugman’s included) laments the Eurozone for creating a monetary union without a fiscal union. This completely misses the point that the Eurozone is suffering from extremely tight money:

Further complicating the issue is that a loose monetary policy for the Eurozone as a whole would likely cause a prolonged period of above-trend inflation in Germany, which they do not want due to some sort of collective short-sightedness.

But this is losing sight of what Miles Kimball wrote in his essay, which was actually about solutions that don’t add to the national debt. These solutions include government-provided lines of credit, a sovereign wealth fund (not in the article), and severing the link between electronic bank accounts and paper currency. It is important to note that these ideas are as good at 0% debt:GDP as they are at 120% debt:GDP.

There is a lot not to like about the Reinhart, Reinhart, and Rogoff study, and Krugman nails much of it; it doesn’t deal with causation. I’m actually kind of confused as to why Miles mentions the study (although he may enlighten me in the comments). However; more importantly, it doesn’t specify 90% debt:GDP as a regime change to a new steady state, or as a transitory experience resulting from something like a recession, or a war. In normal times, the regime change itself is the cause of the turbulence, not the subsequent destination (like going over a waterfall). There is ample evidence that suggests that countries with high transitory debt loads are able to deal with them without incident — provided they return to robust nominal growth. Japan deals with it’s sky-high debt load through financial repression and ultra-tight monetary policy. The cost of this type of action is that the government steals wealth from households.

So in sum, Kimball’s post has useful ideas, even if you skip over the paragraphs talking about the R,R,and R paper — that part of the article wasn’t the point. But if you read only Krugman’s blog, you would leave with the impression that Kimball quite possibly feeds lines to the Very Important People in the US and Europe. That’s wrong and disingenuous. Kimball is a great blogger with interesting ideas (not all of them I agree with), and deserves more nuance.


One thought on “Master of Noance

  1. Agree with all of this, however, I think Krugman was responding to Kimball’s claim that:

    “Paul Krugman wrote in “Austerity, Italian Style” that austerity policies simply don’t work. The downside of their prescription of more spending—and perhaps lower taxes—is that it would add to the United Kingdom’s and to Italy’s national debt. And national debt beyond a certain point can be very costly in terms of economic growth, as renowned economists Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff convincingly show in their National Bureau of Economic Research Working Paper “Debt Overhangs, Past and Present.”

    Krugman might agree with Kimball re: the zero lower bound (or lack thereof), however he is responding to using RRR as a critique of his own claim that austerity is bad.

    Kimball is saying there’s good stimulus and bad stimulus, and I’m sure Krugman agrees. But central to Kimball’s claim is that austerity may not always be bad. He interprets Krugman to be pro-debt, when he is simply anti-austerity.

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