On
election night 2016, I gave in temporarily to a temptation I warn
others about: I let my political feelings distort my economic judgment. A
very bad man had just won the Electoral College; and my first thought
was that this would translate quickly into a bad economy. I quickly
retracted the claim, and issued a mea culpa. (Being an old-fashioned
guy, I try to admit and learn from my mistakes.)
What
I should have clung to, despite my dismay, was the well-known
proposition that in normal times the president has very little influence
on macroeconomic developments — far less influence than the chair of
the Federal Reserve.
This
only stops being true when the economy is so depressed that monetary
policy loses traction, as was the case in 2009-10; at that point it
mattered a lot that Obama was willing to engage in fiscal stimulus, and
it also mattered a lot, unfortunately, that Republican opposition plus
Obama’s own caution meant that the stimulus was much smaller than it
should have been. By 2016, however, the aftershocks of the financial
crisis had faded away to the point that the usual rules once again
applied.
Indeed,
if we could find an economist who didn’t know that there was an
election in 2016, and showed her the economic data for the past couple
of years, she would have no clue that something drastic happened:
For
that matter, economic developments in the U.S. during Trump’s first
year were remarkably similar to developments in other advanced
countries. Europe, in particular, has at least for now emerged from the
shadow of the euro crisis, and is steadily growing — if you take its
lower population growth into account, it’s doing a bit better than the
US:
So we’re living in an era of political turmoil and economic calm. Can it last?
My
answer is that it probably can’t, because the return to normalcy is
fragile. Sooner or later, something will go wrong, and we’re very poorly
placed to respond when it does. But I can’t tell you what that
something will be, or when it will happen.
The
key point is that while the major advanced economies are currently
doing more or less OK, they’re doing so thanks to very low interest
rates by historical standards. That’s not a critique of central bankers.
All indications are that for whatever reason — probably low population
growth and weak productivity performance — our economies need those low,
low rates to achieve anything like full employment. And this in turn
means that it would be a terrible, recession-creating mistake to
“normalize” rates by raising them to historical levels.
But
given that rates are already so low when things are pretty good, it
will be hard for central bankers to mount an effective response if and
when something not so good happens. What if something goes wrong in
China, or a second Iranian revolution disrupts oil supplies, or it turns
out that tech stocks really are in a 1999ish bubble? Or what if Bitcoin
actually starts to have some systemic importance before everyone
realizes it’s nonsense?
I’m
not predicting any of these things, and when the next big shock comes
it will probably come from some direction I haven’t thought of. But when
it does come, we’ll need an effective, coherent response from officials
beyond the world of central banking.
So
imagine such an event happening soon. How confident would you feel in
the team of Donald Trump and Steve Mnuchin? How much leadership could a
weakened Angela Merkel exert in a fragmented Europe?
You
might have thought that such concerns would weigh on markets even now.
But for whatever reason, investors are currently in what-me-worry mode.
And let’s hope that they’re right — that by the time stuff happens,
we’ll actually have non-delusional people in charge.
Follow me on Twitter (@PaulKrugman) and Facebook, and read my blog, The Conscience of a Liberal.
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