You are currently browsing the tag archive for the ‘Krugman’ tag.

 COVID-19: The Economists’ Perspective

By Shlomo Maital

As readers know, I am an economist and have been super-critical of my fellow economists; I believe our prescriptions have done massive damage to the world, including the free-market greed-is-good credo that led to 2007/8.   But in the current pandemic, I am hearing words of wisdom from brilliant economists like Nobel Laureate Paul Krugman, a New York Times columnist.

In his latest Op-Ed, in the New York Times (April 1) Krugman brings some serious wisdom. Let me summarize what he says.

To simplify things, think of the economy as consisting of two sectors, nonessential services (N) that we can shut down to limit human interactions and hence the spread of the disease, and essential services (E) that we can’t (or perhaps don’t need to, because they don’t involve personal interaction.) We can and should close down the N sector until some combination of growing immunity, widespread testing to quickly find and isolate cases, and, if we’re very lucky, a vaccine let us return to normal life.

“For those (like me) still receiving their regular paychecks, this period of shutdown — call it the coronacoma — will be annoying but not serious. I miss coffee shops and concerts, but can live without them for however long it takes.

“Things will, however, be very different and dire for those who are deprived of their regular income while the coronacoma lasts. This group includes many workers and small businesses; it also includes state and local governments, which are required to balance their budgets but are seeing revenues collapse and expenses soar.

   “How big is the N sector? Miguel Faria-e-Castro of the St. Louis Fed summarizes estimates that are as good as any: 27 to 67 million people, [for the United States], which he averages to 47 million. That’s a lot; we could be looking at a temporary decline in real GDP of 30 percent or more. But that GDP decline isn’t the problem, since it’s a necessary counterpart of the social distancing we need to be doing. The problem instead is how to limit the hardships facing those whose normal income has been cut off.

“What can be done to help those cut off from their normal incomes during this period of national lockdown? They don’t need jobs — we don’t want them working at a time when normal work routines can spread a deadly disease. What they need, instead, is money. That is, what’s needed now is disaster relief, not economic stimulus.”

So many ‘experts’ who tell us what should be done, are sitting pretty with large bank accounts and salaries that continue to flow. Krugman’s empathy for those without income – many many millions – is exemplary. THEY are the ones we need to worry about most.

So, as I’ve written elsewhere: Save Lives, yes…and save jobs, too,  by writing checks. If needed, pay the salaries and wages of workers for businesses, to keep them afloat.   Disaster relief…as Krugman says.

Testing holds the key. Why?   Using Krugman’s terminology: Suppose we had sufficient tests, deployed rapidly, with quick results, to know if EVERY working person had COVID-19. Divide the populace into N (non-essential, or infected) and E (essential and clean). If you shut down N+E together, everyone, you lose output and jobs – you lose E times (average output or income of E), which is huge and unnecessary.   If you shut down only N, you get all the jobs and output of E, and income. And you can use it to help pay survival incomes to the N.

This makes sense, right?   And we CAN get those quick automated tests out the door if they are given priority.


Nothing is Rotten in Denmark

By Shlomo Maital

Little Mermaid Copenhagen: The Little Mermaid

   Shakespeare’s famous line, “something is rotten in the state of Denmark”, from Hamlet, needs amendment. These days, very little is rotten there, and other countries can learn much from it. But are they?   Paul Krugman’s latest New York Times column doubts it.

   What is Denmark’s story? It is a welfare state with enormous social benefits, that takes care of its children, homeless, ill people, and others.   It pays for it with heavy taxes, also on the wealthy, but at the same time maintains a vibrant economy. Here is how Krugman, a Nobel Laureate in Economics, decribes it:

   Denmark maintains a welfare state — a set of government programs designed to provide economic security — that is beyond the wildest dreams of American liberals. Denmark provides universal health care; college education is free, and students receive a stipend; day care is heavily subsidized. Overall, working-age families receive more than three times as much aid, as a share of G.D.P., as their U.S. counterparts. To pay for these programs, Denmark collects a lot of taxes. The top income tax rate is 60.3 percent; there’s also a 25 percent national sales tax. Overall, Denmark’s tax take is almost half of national income, compared with 25 percent in the United States. Describe these policies to any American conservative, and he would predict ruin. Surely those generous benefits must destroy the incentive to work, while those high taxes drive job creators into hiding or exile. Strange to say, however, Denmark doesn’t look like a set from “Mad Max.” On the contrary, it’s a prosperous nation that does quite well on job creation. In fact, adults in their prime working years are substantially more likely to be employed in Denmark than they are in America. Labor productivity in Denmark is roughly the same as it is here, although G.D.P. per capita is lower, mainly because the Danes take a lot more vacation.   Nor are the Danes melancholy: Denmark ranks at or near the top on international comparisons of “life satisfaction.”


   How many times does this have to be said? A nation CAN take care of its people – its unemployed, jobless, skill-less, college students, children, sick, mentally ill – while paying for it through taxes (not deficits), and maintain a happy growing economy. The rich? They will pay taxes and not change their behavior on jot.   There is no reason for any political system to pander to the rich, even though they use their funds to buy political influence.

   Nothing is rotten in Denmark. Is anybody watching and listening?   American conservatives? The last word goes to Krugman:

   It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine, which insists that a system like Denmark’s would be completely unworkable.







 A Deep Contrite Apology to the people of Greece

By Shlomo  Maital


      Greece’s new prime minister Alexis Tsipras has been sworn in and vows to lead an anti-austerity coalition.   He could possibly lead Greece out of the euro and back to the drachma.  This would be unspeakably painful for Greece, in the short run, but possibly best in the long run.

      Meanwhile,  we economists all owe Greece an apology. We have caused immense suffering, needlessly, to 11 million innocent Greeks.  According to Nobel Laureate Paul Krugman, economists drafted the ‘troika’ agreement in May 2010, under which the IMF, European Central Bank and European Commission lent Greece money, in return for extreme austerity.    Greece had no choice in the matter. 

    This document assumed Greece would suffer only a small contraction in 2011 and by 2012 would be recovering.  Yes, unemployment would rise to 15 per cent (Would Merkel’s Germany ever accept such a scenario??) in 2012, but then it would fall rapidly.  Why?  Because austerity would work quickly, heal Greece’s economy, and restore growth.

    Really?  Did the troika economists ever find a single (just one! One!) example in history where austerity worked? 

    No. There are none.

    Instead, Greece suffered a depression, 28 per cent unemployment,  its young people migrated abroad, learning German for instance, and youth unemployment reached nearly 60 per cent. 

     Greece kept its part of the bargain, slashing public spending by 20 per cent.  But the promised benefits of austerity turned out to be disaster.  That is why Tsipras won the election.  And it is why the euro has dived.  The EU and its economists brought it on themselves. 

      It isn’t complicated at all.  To heal a budget deficit, you need a growing economy, because when the GDP grows, tax revenues grow much faster, 1.5 times faster.  To get a growing economy, you need spending and demand.  If people can’t spend, because they have no jobs and their wages are falling, only the government can take up the slack. But if you slash government budgets, the economy will shrink, not grow, and the debt problem will become even worse.  That is what ‘austerity’ does.   It’s pretty simple.

On behalf of my fellow economists, I would like to apologize to the people of Greece. We screwed up.  And worse of all —  none of those responsible seem willing to admit it. 

Switzerland: Why It Is Scaring Us

By Shlomo Maital  


Last Thursday Switzerland did two scary things.  Scary for me – many (except for forex traders, who got creamed) did not take much notice.

    First, they cut the interest rate paid on bank reserves to  MINUS 0.75 percent.  Minus???  That means, deposit 1 million Swiss francs, at the end of the year you get back 992,500.  Why? To discourage money from flowing in.  

      Second, most important, the Swiss Central Bank announced it would no longer maintain the exchange rate vis a vis the euro at no more than 1.2 Swiss francs per euro, a policy announced in 2011.  It pegged its exchange rate, to keep the Swiss franc from getting too strong, because the euro was undergoing a series of crisis and losing value.  And each time the Swiss franc goes up relative to the euro, it makes Swiss exports more and more expensive.   In a surprise move, the Swiss now say they can no longer maintain this peg and the Swiss franc will be allowed to rise and strengthen, relative to the euro and of course relative to the dollar.

    Switzerland is one of the world’s most solid stable countries with by far the world’s strongest currency.  It is a safe haven – when things go wrong in the world, and they do all the time,  money flees to Switzerland, buys Swiss francs and sits mostly unnoticed in vaults and bank deposits.  

    Why is a strong Swiss franc a problem? Because Switzerland’s main trading partners are in Europe.  When its currency strengthens, its goods become expensive.  Amazingly, despite the enormously high wages and costs in Switzerland, the Swiss run an export surplus, exporting $308 b. yearly (over 70 per cent of their GDP) and importing only 288 b.  How do they do this?  By making and selling branded goods, high quality, precision machinery, and by selling value rather than cost.  But there is a limit. 

    What do we learn from Switzerland’s actions?

     First, no country is an island.  Europe is suffering from deflation, caused by absolutely stupid austerity policy.  EU policies, by bringing Greece to its knees, brought the euro to its knees as well; because again Greece threatens to leave the euro, and once one country does it,  many others may consider it.  Switzerland is paying the price not for its own mistakes but for those of Europe. 

   Second, deflation.   Economist Abba Lerner once said deflation (falling prices) is 100 times worse than inflation (rising prices).  He may have underestimated deflation.  The only way to dig yourself out of deflation is to stimulate demand. But Europe is doing the opposite.  So Europe is now exporting its deflation to Switzerland. The rising franc will make imports cheaper, and lower prices in Switzerland.  This will boost imports and hurt the economy, thus importing Europe’s folly to Switzerland against its will.

   Why are the Swiss no longer pegging the franc at 1.2 euros?  Because they no longer can.   To do this the Bank of Switzerland has to buy very large amounts of euros, and sell francs, thus expanding the money supply.  The Bank feels it can no longer continue to do this nad maintain Switzerland’s vaunted stability.  Switzerland has an absolutely balanced federal budget, and always does, because the Central Bank has the final say on the budget, and sends it back to the legislature if it is too loose. 

    Columnist Paul Krugman thinks a “fresh wave of safe-haven money was making the effort to keep the franc down too expensive.”     Imagine – you can ruin your country by causing money to flow out,  but apparently, also, by causing too much money to flow in (like Switzerland).    So far the Swiss have brilliantly reaped the benefits of trading with the EU without actually adopting the shaky, fragile, illogical currency called the euro.  But there is no way that the European sickness cannot spread to Switzerland too.  We learned that last Thursday. 

   This whole episode is scary, because it shows clearly that no matter how well run an economy is, and its money,   it cannot avoid the collapse, deflation and folly going on around it.  Sorry Switzerland.   You live in a bad neighborhood.  And you can’t really move those beautiful Alps to, say, the Caribbean. 

Paul Krugman: How Economists Got It VERY Wrong

By Shlomo Maital


Paul Samuelson was arguably the great economist of the 20th C., and certainly one of the greatest of all time. He was a professor at MIT, where I taught for 20 summers, and invariably could be found on weekends working away in his office, even after officially retiring. His book Foundations of Economic Analysis (1947)   (his Ph.D. thesis) reconstructed economic theory, using clever mathematics. But Samuelson was not deceived by his keen mathematical skill. “Elegance is for tailors”, he once said, in describing elegant, but empty, economic theories.

Alas the Economics profession did not heed him. UK Economist Geoffrey Hodgson reminds us of Paul Krugman’s 2009 New York Times article, analysing where economists went wrong in missing the 2007-8 financial collapse, and in some ways actually causing it with their gung-ho free market enthusiasm.

At that time, Krugman (a Nobel Prize winner, it should be recalled) wrote:

“As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.” …..the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

I feel a personal sense of loss and defeat as I read those words. I chose by mistake to study economics. I never did have the mathematical ability to excel in research. But I did have an insight, that behaviour was more important than math, in understanding how people choose and decide. But that idea was like aging wine, ‘before its time’. Behavioral economics has now replaced math as mainstream, helped by the tailwind of economics’ massive failure in 2007/8.

Will this help economists avoid culpability in the next financial crisis?

What’s Wrong with the World? Ask Paul Krugman..and Road Runner

By Shlomo Maital


  Remember the  Road Runner cartoons?   Wile E. Coyote  continually is duped into running off  very high cliffs by the clever elusive Road Runner.

  Well, I think this captures the advice economists have been giving policymakers worldwide, as the world economy again weakens (according to the IMF).  We keep running off the cliff, like Coyote.  And for evidence, I call to the stand Nobel laureate and New York Times columnist Paul Krugman.   I will quote Krugman’s latest Op-Ed, (Oct. 12),  it is rather lengthy, but provides a clear accurate and fairly concise diagnosis.  It causes me to lose sleep – it may do the same to you too, so…beware, before you read on.  Krugman’s words are in quotation marks.  Again, this analysis is long – but essential, if you want to really understand what in the world is going on:   [If you want to stop here, and seek a one – sentence summary:   We’re being killed by high debt,  we need to forgive it, wipe it out and start fresh – there’s no other way]. 

  • Analysis: Where we stand: “The world economy appears to be stumbling. For a while, things seemed to be looking up, and there was talk about green shoots of recovery. But now growth is stalling, and the specter of deflation looms.”
  • We’re fulfilling Einstein’s definition of insanity: Doing the same thing and expecting different results. “If this story sounds familiar, it should; it has played out repeatedly since 2008. As in previous episodes, the worst news is coming from Europe, but this time there is also a clear slowdown in emerging markets — and there are even warning signs in the United States, despite pretty good job growth at the moment.”
  • But WHY are we in this mess, that began 6 years ago? “Why does this keep happening? After all, the events that brought on the Great Recession — the housing bust, the banking crisis — took place a long time ago. Why can’t we escape their legacy? The proximate answer lies in a series of policy mistakes: Austerity when economies needed stimulus, paranoia about inflation when the real risk is deflation, and so on.”
  •  What is the basic problem? “What, after all, is our fundamental economic problem? A simplified but broadly correct account of what went wrong goes like this: In the years leading up to the Great Recession, we had an explosion of credit (mainly to the private sector). Old notions of prudence, for both lenders and borrowers, were cast aside; debt levels that would once have been considered deeply unsound became the norm. Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But my spending is your income and your spending is my income, so when everyone tries to pay down debt at the same time, you get a depressed economy.”
  • What can be done?   “Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up during the bubble years. More often, debt relief takes place implicitly, through “financial repression”: government policies hold interest rates down, while inflation erodes the real value of debt.   What’s striking about the past few years, however, is how little debt relief has actually taken place. Yes, there’s Iceland — but it’s tiny. Yes, Greek creditors took a significant “haircut” — but Greece is still a small player (and still hopelessly in debt). In major economies, very few debtors have received a break. And far from being inflated away, the burden of debt has been aggravated by falling inflation, which is running well below target in America and near zero in Europe. Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.   So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work. Whatever progress debtors make through suffering and saving is more than offset through depression and deflation. That is, for example, what happened to Britain after World War I, when it tried to pay off its debt with huge budget surpluses while returning to the gold standard: Despite years of sacrifice, it made almost no progress in bringing down the ratio of debt to G.D.P.”
  • So, how do we move ahead? “A recent comprehensive report on debt is titled “Deleveraging, what deleveraging?”; despite private cutbacks and public austerity, debt levels are rising thanks to poor economic performance. And we are arguably no closer to escaping our debt trap than we were five years ago. But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves. Maybe, just maybe, bad news — say, a recession in Germany — will finally bring an end to this destructive reign of virtue. But don’t count on it.”

Has Capitalism Run Out of Gas?

By Shlomo  Maital

                car wreck            

  Capitalism – free market economics – has run out of gas.  Here is why.

   We continue to blame the ongoing financial crisis. But in the U.S. that ended a while ago, and American banks have cleaned up their balance sheets, and J.P. Morgan has even agreed to pay a $13 b. fine (a tiny indication of how much money they’re making anyway).   But the ‘recovery’ is stalled, the government shutdown made it worse, and a nagging question arises: Has capitalism run out of gas?

   As New York Times columnist Paul Krugman asks in his latest column, “what if the world we’ve been living in for the past five years [unemployment, stagnation, shrinking trade] is the new normal? What if depressionlike conditions are on track to persist…but decades?”

    U.S. household debt is again at record levels and continues to rise, as Americans try to maintain living standards despite stagnant incomes, by borrowing – even though businesses are deleveraging (shedding debt).  GDP growth is anemic. 

    Krugman cites economist Larry Summers, who told the IMF’s annual research conference that even WITH the housing bubble, U.S. economic growth was not that great –let alone without it. 

    What is going on?

    I think the answer is clear.   With nearly 75 per cent of GDP coming from personal consumption, America’s capitalist system needs people to keep on spending and spending, to buoy the economy.  But we are beginning to wake up to a bitter fact – we work harder and harder, longer and longer, to earn more and more, to buy stuff that brings us no satisfaction or sustained wellbeing, and lose twice – we lose quality time with our families, and find the price we pay for the resulting income,  the useless stuff we cram into our closets,  brings no compensation.  Two-time losers.

     There is a solution.  If we could replace some of the wasteful personal consumption with useful business investment, in infrastructure, schools, highways, fast trains, public transportation, universities, airports, fast broadband —   all the stuff that could repair America’s obsolete  infrastructure —  the economy would indeed grow.  But businesses are simply sitting on their cash, holding it mostly abroad, seeing no reason to invest if consumers are not spending much.  It’s a doom loop closed circle.  China resolved it by having the government undertake infrastructure investment.  In America this is called ‘socialism’ and even Democrats dislike it.  Too bad.

     We need to rethink the whole capitalist system.  When it runs out of steam, because people tire of buying the same old stuff and nothing really new comes along,  we are all in trouble.  Nothing any individual does can help much.  We need to get together, rethink the system, and invent a new one that truly does focus on the wellbeing of individuals and families, on the question, what truly brings sustained happiness?  Here is a clue – you can’t find it in a shopping center.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital