jessefrederik May 19th, 2012 at 2:23 pm
31
Mr Krugman
How much does the currency user/currency issuer distinction matter? Will the bond markets ever turn on Japan/US/UK?
Paul Krugman May 19th, 2012 at 2:32 pm
45
In response to jessefrederik @ 31
For those not clued in, all of the debt crisis countries right now are either countries that gave up their own currencies for the euro, or borrowed heavily in someone else’s currency (Hungary). Countries that issue their own currency and borrow in it, like us, the British, and the Japanese are able to borrow at very low rates even when, like Japan, they have high debt levels.
So can they (and we) ever have a debt crisis? I think so, but it takes much higher levels of debt than even the Japanese have. People have to believe that there’s no way they can service the debt without printing lots of money, even once the economy has recovered.
The closest parallel I’ve been able to come up with (too deep in the weeds, but I can’t help myself) is France after World War I, which had its own currency but a basically impossible level of debt. Even so, the consequences weren’t catastrophic: a sharp drop in the franc, a brief bout of inflation that reduced the real value of the debt, and a return to stability.
The important point for now is that America is nothing, nothing like Greece — that is, unless the austerians push us into a full-on depression out of misplaced fear that we’re going to turn into Greece …
(h/t jessefrederik in the comments)
No forced insolvency, only operational constraint is inflation.
10 comments:
I also asked him about the NAIRU.
Jesse Frederik:
What do you think is the full employment rate of unemployment? Do you still believe in the NAIRU?
Paul Krugman:
Let me run this backwards. I believe that if we tried to keep unemployment at 3 percent for a prolonged period, we would experience accelerating inflation. So I guess I do believe in a NAIRU. Where is it? Probably around 5, although there are worrying signs that prolonged mass unemployment may actually be pushing it gradually up.
But you do have to be careful: saying that too low an unemployment rate will mean accelerating inflation doesn’t mean that stable inflation means that we’re at full employment. Wonk alert! I think we now have overwhelming evidence that there is a long-run, not just short-run, tradeoff between inflation and unemployment at low inflation rates, that we could have lower unemployment in the long run if we accepted 3 or 4 percent inflation than if we insist on keeping the rate below 2 or worse yet below 1. So in that sense I don’t believe in the NAIRU anymore; even the long-run Phillips curve is sloped near the bottom.
For those who have no idea what I’m talking about, lucky you.
So he thinks you can have stable non-accelerating inflation at or above the NAIRU, and that if you are well-above the NAIRU you can push unemployment down and maintain a stable non-accelerating inflation rate, but because there is a long-run tradeoff, that non-accelerating rate will have to be higher than the rate you get at higher rates of unemployment.
I will never fully understand all this NAIRU business, since I don't understand its theoretical basis. I don't see any obvious logical or causal reason why the phenomenon of prices has to be bound up the level of employment and output.
An unemployment rate of five percent is unacceptable because it will block us from eliminating poverty.
The elimination of poverty requires an unemployment rate no higher than 3 percent.
yes! great to see and hear. He seems to have the ears of many high officials so this is definitely a good sign.
I will never fully understand all this NAIRU business, since I don't understand its theoretical basis. I don't see any obvious logical or causal reason why the phenomenon of prices has to be bound up the level of employment and output.
yes I completely agree with you Dan and find myself in the same position.
To my mind, inflation can ONLY occur with excess cash in the private sector (or public sector through continually raising their purchasing price points). If my monthly income is used up by all of my monthly costs of living, then there is NO WAY that I can see for demand-pull inflation to occur, b/c if producers and sellers were to raise prices on the goods/services that I currently buy each month, I will NOT be able to pay those prices without having excess cash (or credit as the case may be) available to me.
It for these sames reasons that I can't stand how people can ever think that social security will ever be inflationary at the income levels we currently issue to our seniors relative to their standard cost of living, not to mention that social security is phased out based on income levels.
The reason why there is a relationship between employment and inflation strikes me as be blindingly obvious. It’s as follows.
Given inadequate AD, businesses will be hard pressed to get away with raising their prices, plus there will be excess unemployment. If demand then rises, employment rises. And if demand rises to excessive levels, there’s a shortage of everything. Employers will attempt to out-bid each other for skilled labour. Unions put in for extra pay increases because they know they’ll probably get away with it. There’s a shortage of equipment and materials, so the price of those gets bid upwards, etc etc. That equals excess inflation.
Given the above phenomena, there must be some level of employment at which inflation exists, but is at an acceptable level. As Krugan rightly pointed out and as ten thousand other economists have pointed out, it’s impossible to know EXACTLY what level of employment corresponds to NAIRU. Nevertheless, NAIRU is a useful theoretical concept.
Ralph, how can effective demand rise to excessive levels so long as the government deficit isn't excessive? People can have all kinds of unfulfilled desires. But they can only translate those desires into market demand, and place pressure on prices, if they have wages to spend. Why can't an economy at full employment be in an equilibrium where private sector wage-earners are receiving exactly the amount in wages that is sufficient, in combination with the government sector's expenditures, both to accommodate their own savings desires and also purchase the economy's total output at the prevailing prices?
a good point Ralph, however I have some questions for you:
How do you know that the supply constraints exist at those specific levels as we approach full employment? What if the total supply of goods/resources can accommodate our nation at full employment? Then your scenario does not occur. Also since there are more people working, whose to say that various other technologies and ways of accomplishing tasks aren't being used differently than the way they are now. In other words, it sounds like you are assuming that a full employment economy is exactly like our current economy except there are more people working in the SAME jobs, doing the SAME things. That may not be the case, b/c with full employment becomes a wider margin for innovation, creativity, and newness.
#2. The scenario you are describing sounds more like cost-push inflation to me rather than demand-pull inflation due. In other words, couldn't the same scenario you are describing be accomplished at a non-fully employed economy so long as the demand is sufficient to max out resources? Yes more employed people would ADD to the issue of limited supply of resources, however the REAL issue is not with full employment, but rather with supply constraints. And if that is the case, then our society is destined to perish due to those constraints. Unemployment then becomes an inhuman means of delaying the expenditure of those supplies. The real question in that scenario is how much supply do we have, how can we get off that supply, and get onto something more sustainable.
Thoughts?
Ralph: "Nevertheless, NAIRU is a useful theoretical concept."
The question is whether it should be the basis for a rule governing monetary policy. If so, on what basis? Assumptions, please.
Dan Kervick, perfect competition doesn't exist.
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