Look, if Sumner wants to boast that he knows more about Fed history, or more about ordering in a hibachi restaurant, or more about Swedish apartments, I won’t bat an eye. But in this post (HT2 Daniel Kuehn) he tried to make fun of Krugman…that’s my job. Look at Sumner’s swipe at Keynesians (and he has Krugman in particular in mind):
[Sumner writing:] Each day I check out the major stock markets. This morning I saw that Hong Kong and Singapore were down over 1%. Britain, Germany and France were also down. But the Japanese market, which tends to move with the other Asian markets, was up by 1.90%. That’s a surprisingly large divergence. Is there any news? It turns out that there is news, but only if you don’t believe in “liquidity traps.” Travis Allison sent me the following:
The yen slumped to the lowest in more than six months against the dollar on prospects Japanese elections next month will hand power to an opposition party that advocates more aggressive monetary easing.
. . .
Japan’s currency weakened to almost a two-week low versus the euro on speculation the vote will favor Shinzo Abe, who called for the central bank to provide unlimited stimulus.
. . .
“The leader of Japan’s opposition is coming down quite heavily, saying what he would like the Bank of Japan (8301) to do in terms of easing and that’s pressuring the yen,” said Jane Foley, a senior currency strategist at Rabobank International in London.
“The biggest economic problem is prolonged deflation and a strong yen,” Abe, the head of the largest opposition Liberal Democratic Party, said in a speech in Tokyo today. “Markets will only start to react once unlimited monetary easing is conducted.”
The Bank of Japan must cut its benchmark interest rate to zero or even lower to boost lending, Abe said. The rate is currently set at a range of between zero and 0.1 percent. Earlier this month, Abe said the BOJ should conduct monetary easing until the nation achieves 3 percent inflation. Consumer prices excluding fresh food fell 0.1 percent in September, declining for a fifth month.
[Back to Sumner's commentary:] Of course if you are one of those Keynesians who do believe in liquidity traps, then you’d have to conclude that this speech had no impact on the Japanese exchange rate, or the Japanese stock market.
Sumner then goes on to talk about Switzerland, and links to a Krugman post where he and Sumner disagreed about the implications of the liquidity trap for the Swiss currency.
In the comments I was succinct:
Scott, I really don’t get this post. (I hope you were sitting down for that.) You’re saying Paul Krugman has no way of explaining why the promise of future monetary expansion by the BoJ could be expansionary today? How can you possibly say that?
I actually thought that would be the end of it. I thought it would be like Encyclopedia Brown pointing out that things look upside-down when they are reflected in a spoon, and so, “Caught in his lie, Bugs Meany returned the stolen hamster.”
But no, Scott pushes more chips in, with this being his whole comment in response to my concern (and another guy who echoed me):
People should look at my second link if they wish to understand Krugman’s views.
Thanks for the Japan info.
Liberal Roman, That’s possible.
No, Scott, when it comes to how Krugman would explain a promise of future monetary expansion by the BoJ affecting aggregate demand today, I don’t think we should go read your post (“my second link”) on Switzerland. I googled “krugman liquidity trap japan”) and this was the top hit. Take a look at this excerpt:
The purpose of this paper is to show that the liquidity trap is a real issue – that in a model that dots its microeconomic i’s and crosses its intertemporal t’s something that is very much like the Hicksian liquidity trap can indeed arise. Moreover, the conditions under which that trap emerges correspond, in at least a rough way, to some features of the real Japanese economy. To preview the conclusions briefly: in a country with poor long-run growth prospects…the country therefore “needs” expected inflation….
If this stylized analysis bears any resemblance to the real problem facing Japan, the policy implications are radical. Structural reforms that raise the long-run growth rate (or relax non-price credit constraints) might alleviate the problem; so might deficit-financed government spending. But the simplest way out of the slump is to give the economy the inflationary expectations it needs. [Bold added.]
So no, I have to call foul. If Scott wants to argue that Krugman’s views on Switzerland don’t match up with his FAMOUS views on Japan’s liquidity trap, OK fine. Maybe they do, maybe they don’t. But you don’t get to quote a news story about Japan doing what Krugman has said it should do since the late 1990s because they’re in a liquidity trap and then when it “works,” say how this proves Krugman doesn’t understand a liquidity trap.