From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘Paul Krugman

Dreams of GDP growth

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Paul Krugman and I don’t necessarily agree on everything, either in politics or economics, but I respect his research (and yes, envy his Nobel Prize).  That said, he has an insightful piece on his blog about The Donald’s economic projections, which both Paul and I find probably untenable.  I encourage you to read it here.

In short, The Donald projects 3% to 3.5% GDP growth throughout his tenure in the White House.  Under Reagan, it was at the lower end of this scale, and under Clinton it hit 3.7%.  Remember that both of those presidents inherited crappy economies, and so  a pendulum bounce in GDP would have been expected.  The Donald is inheriting a healthy overall economy (admittedly, with pockets of problems).  As such, growth in the 2+% range is more likely. So why are they projecting such glossy numbers?  In short, they back into what they need to say in order to fit their rosy projections.

I would note that the Chair of the Council of Economic Advisors sits vacant as of this writing, with no nominee in the offing.  This Council serves the president, among other ways, by putting a reasonableness test on just such projections.  Truly excellent economists have served on this Council thru the years, from all sides of the economic spectrum (and yes, there are more than two).  In the absence of trained, academic economists in this role, these projections are left up to whim.

Unlike Paul K, I have some hope that Paul Ryan may be a voice of sanity here.  He seems to understand that balance sheets need to balance.  Let’s see how that works out.

Written by johnkilpatrick

February 21, 2017 at 12:00 pm

Paul Krugman’s Column

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Frequently I disagree with Prof. Krugman, but I nonetheless enjoy reading what he has to say. His writing is clear and lucid, and he backs up what he has to say with facts rather than simplistic conjecture. Nobel Prize Winners tend to write like that.

Today’s column in the New York Times is no exception, and this happens to be one of those times that I agree with him. Indeed, I think he doesn’t go far enough. I’ll leave the bulk of what he’s said for you to read on your own, but basically he ties global warming (even if you disagree with the theory, you can’t argue with the empirical observations) to floods, famine, and food inflation. Many critics (the Chinese, right-wing-ers, etc.) blame Ben Bernake and QE2 for the crisis. That theory has a real cart-before-the-horse problem. As it happens, global food price inflation became a reality before QE2, not after. Some theorists would also blame China and other developing nations — as their economies grow, their people want and indeed need better calorie counts. City dwellers have less time to prepare complex meals from simple ingredients, thus adding to the food logistics chain.

Krugman draws, I think, a difficult but correct conclusion that global unrest (Egypt, Tunisia) has to be placed in the context of food prices. In developing countries, food makes up a much larger portion of consumption expenditures than it does in the U.S., Japan, or Europe.

Where Krugman stops short, unfortunately, is the more direct implications for the U.S. Authoritarian governments who draw this lesson properly will find themselves caught between a rock and a hard place. On one hand, they will want to pay workers more, either directly (through higher wages) or indirectly (through food subsidies). China, with enormous cash reserves, has the easiest time of this. Indonesia, for example, will face problems. On the other hand, rising wages means either directly raising the costs to the consumers (that’s us and our European friends) or indirectly raising it via currency manipulation (which few countries have the ability to do). Of course, consumers faced with rising prices have the option of decreasing consumption, something which is fairly easy to do when we’re talking about non-essentials. Declining consumption leads to unemployment abroad, which frightens the daylights out of authoritarian regimes.

U.S. consumers have enjoyed rapid increases in consumption with relatively flat-lined prices for the last three decades, due to the juxtaposition of relatively flat commodity prices (food, energy, raw materials), rapid increases in productivity, and global application of the law of comparative advantage. Spikes in commodity prices could change all of this, as we saw in the 1970’s, and THAT may be the most important thing to look at in the economy right now.

Written by johnkilpatrick

February 7, 2011 at 10:06 am

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