01 Dec 2012

Scott Sumner Devastates Paul Krugman on the Liquidity Trap

Krugman, Scott Sumner 76 Comments

[UPDATE below.]

Whoa, Bob Wenzel tipped me off to this one… Sumner absolutely destroys Krugman in this post. (Also, I have street cred for making such a call–when Scott ignored Krugman’s writings on Japan in order to score a blog point, I called a foul.) I had never seen these passages that Scott dug up from a 1998 Krugman paper on the liquidity trap. So to be clear, the below words are from Krugman:

The point here is that the end of the Depression – which is the usual, indeed perhaps the sole, motivating example for the view that a one-time fiscal stimulus can produce sustained recovery, does not actually appear to fit the story line too well; much though by no means all of the recovery from that particular liquidity trap seems to have depended on inflation expectations that made real interest rates substantially negative.

If temporary fiscal stimulus does not jolt the economy out of its doldrums on a sustained basis, however, then a recovery strategy based on fiscal expansion would have to continue the stimulus over an extended period of time. The question then becomes how much stimulus is needed, for how long – and whether the consequences of that stimulus for government debt are acceptable.

The political point is that Japan – like, we might note, the United States during the New Deal – appears to have great difficulty working up its political nerve for a fiscal package anywhere close to what would be required to close the output gap. Exactly why is an interesting question, beyond this paper’s scope.

Does this mean that fiscal policy should be ignored as part of the policy mix? Surely not. On the general Brainard principle – when uncertain about the right model, throw a bit of everything at the problem – one would want to apply fiscal stimulus. (Even I wouldn’t trust myself enough to go for a purely “Krugman” solution). However, it seems unlikely that a mainly fiscal solution will be enough. [Bold added.]

Does everyone see the absolute stunning beauty here? Christmas is early this year. Back in 1998, Krugman referred to a “Krugman solution” as being: You get your economy out of a liquidity trap by relying exclusively on monetary policy, not at all on fiscal policy.

BTW, Scott anticipates the obvious objection to his gotcha:

I can already anticipate commenters telling me that Krugman has a right to “change his mind.” Yes, but the 1998 liquidity trap paper was written after he changed his mind about liquidity traps. This is the paper he frequently cites in his blog as representing his current views. [Emphasis in original.]

Feeling like I needed to do my part to help the cause, I said this in the comments:

Scott, wow, this was awesome. I wasn’t aware of the “Krugman solution” phrase before; absolutely amazing.

Scott we need to come up with rhetorical tricks analogous to “invisible bond vigilantes” and “confidence fairy.” I propose that from now on, we use the term “Krugman solution” to mean someone ripping the crap out of people who say the same thing you yourself said in the past, but now is inconvenient for your political views.

UPDATE: OK in the comments there is more confusion than usual, and this was my fault. I didn’t want to overload you guys with a bunch of block quotes, so in the main post above, I didn’t give you the context for Sumner’s quoting of this 1998 Krugman paper. What happened is that Tyler Cowen and that Alesina (?) both recently said things that were in favor of fiscal austerity (I didn’t follow the links, I’m just taking Krugman’s word for it), and Krugman said they were ignoring Macro 101 (his term) and said something like, “These people aren’t dumb, so what’s going on here?” It was incredibly patronizing. So, Scott pointed out that they could have justified their statements quite nicely by citing Krugman 1998. There’s no two ways about it, that is just plain weird. You can’t call people ignorant of Macro 101 if they are saying what you yourself argued in a paper in 1998, and moreover the very paper that you now cite as your epiphany on the liquidity trap!

76 Responses to “Scott Sumner Devastates Paul Krugman on the Liquidity Trap”

  1. Lord Keynes says:

    So you’re astonished that a person who began as a standard New Keynesian has shown some intellectual development in the course of his career, coming to different opinions from what he held earlier.

    It’s a feeble tactic, and your implied/implicit point appears to be that somehow this discredits Krugman’s mature views now.

    This legerdemain could easily be applied to Austrian economics. E.g., Hayek advocated liquidationism in the early 1930s, but then changed his mind and gave qualified support to Keynesian stimulus in a depression:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/did-hayek-advocate-public-works-in.html

    Therefore we can dismiss all of Hayek’s mature views on economics!! And all modern Austrian economics can’t be right either!: because, after all, Hayek changed his mind!

    • Bob Murphy says:

      So you’re astonished that a person who began as a standard New Keynesian has shown some intellectual development in the course of his career, coming to different opinions from what he held earlier.

      You guys are so slippery it’s amazing. Krugman is saying in his latest blog post that anybody with the audacity to say we don’t need fiscal stimulus right now, is ignorant of Macro 101. So LK when you say Krugman showed some “development” in the last 10 years, you mean he opened up a freshman textbook?

      • Lord Keynes says:

        ” Krugman is saying in his latest blog post that anybody with the audacity to say we don’t need fiscal stimulus right now, is ignorant of Macro 101″

        Never heard of rhetoric or figures of speech, huh?

        Krugman is using the same rhetorical tactic as hordes of Austrians would if they said as a snide response to Keynesians: “you’ve never done Economics 101!!”, and so on.

        “So LK when you say Krugman showed some “development” in the last 10 years, you mean he opened up a freshman textbook?”

        No, I mean he has come to see that elements of the New Keynesian paradigm are wrong.or questionable.

        That Krugman has come to appreciate Hyman Minsky and some elements of heterodox Keynesianism, just as he has said here:

        “I really am gravitating toward a Keynes-Fisher-Minsky view of macro, although of the three I’d much rather read Keynes.”

        Paul Krugman, “Actually existing Minsky,” May 19, 2009, http://krugman.blogs.nytimes.com/2009/05/19/actually-existing-minsky/

        • Bob Murphy says:

          LK wrote:

          Krugman is using the same rhetorical tactic as hordes of Austrians would if they said as a snide response to Keynesians: “you’ve never done Economics 101!!”, and so on.

          LK, you find me a blog post from, say, Bill Anderson in which he is at his most indignant against Krugman–saying he’s a shill, not even an economist, etc.–and then you point me to Bill Anderson saying exactly the same thing for which he’s criticizing Krugman, and then we’ll talk.

          it is astounding to me that you guys apparently don’t even see the appearance of a problem here. It doesn’t seem at all odd to you, for Krugman to accuse someone of not understanding Macro 101 when Krugman wrote the exact same view in a paper himself?!

          • Major_Freedom says:

            Hmmm, I agree with what you are saing about PK, but I would be willing to bet a lot of money that Anderson has mentioned “econ 101″ and PK is the same post at some point in the past. of course I don’t know for sure, but it doesn’t sound all that unreasonable.

            • Ivan Ivanov says:

              The point is whether Bill Anderson has , in the same post, blasted Krugman for saying something Anderson used to say in the past.

              It’s one thing to say “yeah I know where you’re coming from, I used to hold that position myself, and here is what changed my mind”, but when you basically call someone a retard for holding a position you propagated yourself… that takes some balls.

              What is even more stunning is the mental gymnastics other Keynesians go through to pretend there’s nothing to see here.
              I’ve literally seen more integrity coming from young earth creationists when you showed them something that conflicts their beliefs.
              They at least showed some discomfort while trying to reconcile their beliefs.

            • Bob Murphy says:

              MF wrote:

              Hmmm, I agree with what you are saing about PK, but I would be willing to bet a lot of money that Anderson has mentioned “econ 101″ and PK is the same post at some point in the past. of course I don’t know for sure, but it doesn’t sound all that unreasonable.

              MF by all means, please speak up whenever you think I’m overstepping in my arguments with Daniel, LK, etc., because it may be (as in this case) that you’re misunderstanding me–which means I’m obviously being unclear, if even *you* are feeling sympathetic to Krugman.

              Here’s what I said to LK:

              ==> Yes, of course Austrians use heated rhetoric against Krugman (and other enemies) all the time, particularly those south of the Mason-Dixon line.

              ==> I want you to find me an example of an Austrian who, say, calls Krugman a non-economist for saying a terrorist attack can boost GDP…and then you find that exact same Austrian economist saying “a terrorist attack can boost GDP–this is the ‘Bill Anderson solution to depressed economies’”–14 years earlier.

              ==> *That’s* what Krugman has done here. He has said that anybody who holds the view that Krugman himself held in 1998, doesn’t understand Macro 101. I defy you to show me an Austrian who did anything like this, and if you do, I sure as heck won’t defend the person, I’ll say, “Yeah that’s ridiculous.”

              • Ken B says:

                You’re mixing threads Bob. Econ 101 is the other thread, right?

              • Major_Freedom says:

                I guess I got confused. I said I agreed with what you said about PK, and when I said I thought Anderson probably has said PK doesn’t know econ 101, I failed to realize that you were asking not for an example of Anderson saying econ 101 and PK in the same post, but rather an example of Anderson chiding PK for X, and yet Anderson himself argued in favor of X at another time.

                ————-

                Ken B: I don’t think the threads are being mixed up. Murphy’s response to me was on topic.

              • Bob Murphy says:

                Ken B. wrote:

                You’re mixing thread, Bob.

                No, I’m not. You have to click through and see what Krugman wrote, to trigger Sumner’s wrath. Krugman said Tyler Cowen and Alisina (or whatever) don’t know Macro 101, because they think spending cuts right now might be a good idea.

    • Major_Freedom says:

      So you’re astonished that a person who began as a standard New Keynesian has shown some intellectual development in the course of his career, coming to different opinions from what he held earlier.

      Or, it could mean that their current views are just a product of the same ignorance and intellectual weakness that lead them to believing in the wrong view prior. If they were wrong before, then they may be wrong now, because they have already shown themselves as capable of being all self-righteous and vitriolic to one’s intellectual opponents, about incorrect views.

      There is a difference between abstaining from making a judgment about things one does not even have the requisite knowledge, while developing over time as new knowledge is learned, thus having one’s mind changed as one learns, and doing what Krugman did, which is to take one’s incomplete knowledge, refuse to abstain judgment about things one is not intellectually equipped to deal with, present claims and assertions as if they are true, and not only that, but beliitle and mock those who don’t agree with those claims, and then, have the audacity to change one’s mind and feign offense at those who were previously belittled and mocked for daring to bring it up?

      That takes some schutzpa.

      It’s always amusing when those who make a career out of mocking those one disagrees with, try to hide behind the shield of “Hey, I’m just developing intellectually” when one disagrees with one’s former self.

      As for Hayek, you need to get it through your head that Hayek is not the intellectual figurehead of Austrianism. Ludwig von Mises is the intellectual figurehead. If you are talking about Austrianism, you are talking about Mises. He was Hayek’s mentor. The distinctly Austrian “method” is Misesian, not Hayekian.

      • xgsmmy says:

        MF, Krugman has apparently changed his views on fiscal policy. This can be explained by his former fear of the bond vigilantes. He hasn’t really changed his views on monetary policy, this is a fantasy of Scott Sumner’s. (Krugman wrote a book criticizing Bernanke for not doing more.)

        Krugman merely thinks that for whatever reason the Fed can’t or won’t create higher inflation.

      • Matt Tanous says:

        “As for Hayek, you need to get it through your head that Hayek is not the intellectual figurehead of Austrianism. Ludwig von Mises is the intellectual figurehead. If you are talking about Austrianism, you are talking about Mises. He was Hayek’s mentor. The distinctly Austrian “method” is Misesian, not Hayekian.”

        Even more damaging to LK’s obsession with Hayek as “refuting” somehow the Austrian position, it is a standard position with the Austrian economic community that Hayek was wrong on a lot of things. In fact, to paraphrase Rothbard’s reference to a different economist, I’d say that almost nothing Hayek originated was true, and almost nothing he wrote that was correct was original. Hell, LK knows this – he is aware of, for instance, Hoppe’s critique of Hayek (although perhaps not the more detailed version of it: http://mises.org/journals/rae/pdf/R71_3.pdf ), and discounts this. Hayek, according to LK, is the true head of Austrian economics. I think that Hoppe was basically right – it’s because he can use Hayek’s numerous errors and contradictions to attack the Austrian position (“even Hayek believed”). Certainly, as Milton Friedman was the Establishment’s pet Libertarian, Hayek was the mainstream economists’ pet Austrian.

        • Lord Keynes says:

          “Even more damaging to LK’s obsession with Hayek as “refuting” somehow the Austrian position, it is a standard position with the Austrian economic community that Hayek was wrong on a lot of things”

          You have laughably failed to even understand what was said above.

          Read carefully:
          This legerdemain could easily be applied to Austrian economics. E.g., Hayek advocated liquidationism in the early 1930s, but then changed his mind and gave qualified support to Keynesian stimulus in a depression:

          http://socialdemocracy21stcentury.blogspot.com/2011/09/did-hayek-advocate-public-works-in.html

          Therefore we can dismiss all of Hayek’s mature views on economics!! And all modern Austrian economics can’t be right either!: because, after all, Hayek changed his mind!”
          ——-

          The last sentences are not my opinion: they are merely an example of an equally feeble, flawed argument to the one implied by Murphy.

          On the contrary, I do not think Hayek’s change of mind refutes his mature thinking on economics. Nor does his shift refute all of modern Austrian economics.

          Perhaps you are too thickheaded to infer that the exclamation points were an indication of irony.

          “Hayek, according to LK, is the true head of Austrian economics.”

          Wrong. I think no such thing. My position is that Austrian economics is a heterogeneous movement, especially as the early Austrians were not especially hostile to government intervention (indeed Wieser expressed a sympathy with a mild Fabian socialism), as you can easily verify for yourself:

          http://socialdemocracy21stcentury.blogspot.com/2012/06/debunking-austrian-economics-101.html

          http://socialdemocracy21stcentury.blogspot.com/2010/12/different-types-of-austrian-economics.html

          http://socialdemocracy21stcentury.blogspot.com/2011/06/why-are-there-no-austrian-socialists.html

          • Matt Tanous says:

            “The last sentences are not my opinion: they are merely an example of an equally feeble, flawed argument to the one implied by Murphy.”

            Murphy’s argument was nothing so ridiculous, you straw manning fool. That is why I didn’t interpret your statement as “irony” – because it was obviously ridiculous, and had nothing to do with Murphy’s claim. Murphy was discussing how Krugman claims to hold one position while pointing to the opposite position in a paper he claims to still agree with. Not merely that he changed his mind, but that he – once again – contradicts himself.

            “My position is that Austrian economics is a heterogeneous movement”

            You recognize this, but even in your “debunking” list, you have many, MANY posts linked supposedly “refuting” MIses or Rothbard with “Hayek didn’t accept a priorism” or “Hayek didn’t agree on X, Y, and Z.” You recognize the difference, but you still rely on arguments from the authority of Hayek to “refute” the Misesian-Rothbardian paradigm.

      • Anthony Lima says:

        Major-you are a god! I bow before you and light a stick of incese in your honor. This exact thought is in my head everytime someone mentions Hayek as an Austrian totem! I think “the dummy hasn’t read (hell listened to, don’t even have to be literate) Mises!

  2. xgsmmy says:

    Bob, have you considered that Krugman getting it wrong on the bond vigilantes during the Bush administration may have changed his views on the riskiness deficit spending?

    I would also say that the Euro crisis (and possibly his debates with the MMT crowd) has noticeably softened his views on fiscal policy in monetarily sovereign countries.

    • Bob Murphy says:

      Again, I didn’t realize they taught in Macro 101 that views of bond vigilantes changed in 2004. Are you saying the textbooks from before then said one thing, but then after 2004 they changed?

      I think I know what may be going on here: You guys are just reading my post here, instead of clicking through and reading what Krugman wrote, to inspire Scott’s righteous fury. Go read what Krugman said about Tyler Cowen.

      • xgsmmy says:

        Bob, I think you and Scott are blinded by your feuds with Krugman. Is Tyler Cowen a monetarist advocating a higher inflation target? Perhaps he is, and perhaps he wasn’t calling for spending cuts now but for a medium term plan, but the tweet Avent is responding to is talking about the “fiscal cliff” not market monetarism as Sumner seems to believe.

        Krugman is talking about austerity at the zero lower bound, not NGDP targeting.

        • Bob Murphy says:

          xgsmmy if you don’t know what Tyler’s views are, then why are you telling me I’m “blind” on this? Isn’t that a bit weird?

          Tyler Cowen is totally a Sumnerite in this respect. He was the one who (absurdly) called QE3 Scott Sumner Day.

          Why is it so hard for people to just admit, “Yeah, Krugman is a hypocrite”? You wonder why some of us keep harping on it? It’s because he has so many fans that make excuses for him. I don’t spend time blogging about OJ Simpson, because I don’t see tons of people defending him.

          • xgsmmy says:

            Tyler Cowen is totally a Sumnerite in this respect. He was the one who (absurdly) called QE3 Scott Sumner Day.

            That post is hardly advocacy. Who knows what Cowen really thinks, was my point, not that I’m totally unfamiliar with his writing. I seem to remember him praising Ireland and talking about zero marginal product workers.

            Maybe he’s “evolved” his views, but if you notice every time he talks about inflation he expresses his fears and doubts and concerns. So maybe he’s just hedging his bets or maybe Kochtopus has a grip on his brain.

            But the tweet Krugman was responding to had nothing to do with inflation. It was about austerity. (Although, again, maybe Cowen was talking making medium/long term deal now, not austerity now.)

            • Richard Moss says:

              xsgymmy,

              You wrote “That post is hardly advocacy. ”

              Tyler, from that post;

              “I disagree with Scott on a number of points (I think he overrates the importance of sticky nominal wages for instance, and I would like to force him to admit that the private sector can manufacture nominal gdp), and I see the net gains from this policy as smaller than he does. Still, Scott deserves our highest level of applause in this matter.”

              That’s ‘hardly’ advocacy?

              • Richard Moss says:

                sorry, xgsmmy

              • xgsmmy says:

                Richard, did you not see that list of qualifications? Notice he doesn’t say anything positive about the policy, only about Scott.

                I read him as congratulating Scott for his alleged influence on policy. (Although, this is questionable, Scott has influenced the discussion.)

                But as I said maybe he has changed his mind. I’m skeptical, though. It seems like he’s “playing it smart” by hedging his bets. Which would be interesting after he declared Ireland a success.

              • Richard Moss says:

                xgsmmy,

                Yes, I saw the list of qualifications – that is why I included them in the quote.

                I thought it was important to include them against what I read as his ‘advocacy’ in the end.

                Expressing support for a policy, with some qualifications, isn’t exactly unheard of. (Kind of like Krugman advocating an alien invasion myth as a second best option).

                Never mind the ‘highest level of applause’ comment – in the end he said Scott’s policies would be a ‘net gain’.

                Really, if Tyler just wanted to congratulate Scott because he influenced Bernanke, I think he should have written something very different.

              • xgsmmy says:

                Okay, you’re right he did say “net gain”.

                I just did some searching and Cowen claims he hasn’t changed his views since 2008-2009. (He only links to a 2009 article that doesn’t take a side.)

                I’m still suspicious of his sincerity and motives. (And if he’s sincere the coherence of views.)

                For example here he is saying monetary policy matters less every day. (Sounds like an excuse to do nothing.)

            • Bob Murphy says:

              xgsmmy wrote:

              But the tweet Krugman was responding to had nothing to do with inflation. It was about austerity.

              Right, and Krugman from 1998 said he was very skeptical that prolonged fiscal stimulus in a liquidity trap would justify the increase in the government’s debt. I.e. someone who wanted to currently argue that we should have austerity, could cite Krugman 1998 as an authority on the subject.

              Krugman is perfectly free to say, “Yeah, I was wrong back in 1998, and so you’re wrong now,” but he cannot say, “This is Macro 101 kids, I don’t see how these guys can be this dumb. Oh wait they’re not dumb, they must just be evil.”

              • xgsmmy says:

                Bob, you may a point.

                It’s unclear to me whether at the time Krugman meant Japan just shouldn’t do fiscal stimulus or shouldn’t have a deficit at all (and should possibly have a surplus). (Although, I’m thinking he just meant additional stimulus not cyclical deficits.)

                But I don’t think many people would call targeting higher inflation austerity. Tight fiscal policy and loose monetary policy is similar to the Rubinomics of the Clintion years. (The difference being the liquidity trap.)

                However, given that the Fed seem unlikely to target higher inflation, I still don’t see how Krugman criticizing Cowen’s statement is wrong.

                Maybe Cowen thinks Bernanke will raise his target to more than offset any contraction from spending cuts and tax hikes?

          • Daniel Kuehn says:

            This is truly marvelous.

            You have this penchant for writing flop gotcha posts about Krugman.

            We point out they’re flop gotcha posts.

            And then you claim that you write them because we defend him?

            So let me get this straight – if we just let you have your gotchas you’d stop writing them? Or do we have to actually agree with them?

            Why is it so hard for you to just admit that these posts fall flat?

            • Ivan Ivanov says:

              The problem is you’re not really responding to the posts.

              Here’s an experiment you could try:
              Describe with your own words what is Murphy’s problem with Krugman in this (or other) post.
              Respond to his argument only after Bob says “Yeah Daniel, that’s what I was talking about”.

              If you go through that process you might be able to reasonably claim these are flop posts.

              • Daniel Kuehn says:

                Ivan, Bob and I regularly circle around what he thinks Krugman said and what I think Krugman said and why the two are incompatible.

                One of the nice things about Bob is that he’s generally very good at not twisting my claim into something goofy. It almost always boils down to Bob thinks he said one thing and I think he said something else, and we both recognize that difference.

                I do reasonably claim they are flop posts. They almost always are.

              • Ivan Ivanov says:

                I know you guys circle around this regularly, I’ve been reading this blog for years now (and lurked around yours a couple of times too).

                My impression is that you have the uncanny ability of completely missing the point in your replies, while appearing somewhat relevant.

                If this isn’t Bob’s impression, then I guess I’ll give it a rest, but I would really like to see the two of you go through the process I described above.
                It’s some kooky thing either, from what I heard professional mediators ask their clients to do this as step 1 when handling disputes, and people have a surprising amount of difficulties just accurately restating their opponent’s positions.

              • Daniel Kuehn says:

                re: “My impression is that you have the uncanny ability of completely missing the point in your replies, while appearing somewhat relevant.”

                That’s my impression of Bob often too.

                That’s the impression of anyone who thinks they understand everyone’s point, thinks their point is the more valuable one, and thinks that the other guy is missing the stunning insight that they are offering.

                All you’re really telling me is that you tend to agree with Bob and not with me.

              • Ivan Ivanov says:

                All you’re really telling me is that you tend to agree with Bob and not with me.

                No.
                I somehow manage to not have that impression of Karl Smith, even though I tend to agree with Bob, and not Karl.
                So I’m telling you more then just the fact that I disagree with you.

              • Daniel Kuehn says:

                OK, well now I have your advice for me and your considered criticism of me.

                I really think you’re barking up the wrong tree on both counts, but I’m not sure I can say anything to change that.

            • Matt Tanous says:

              From my perspective, it really seems like Murphy tends to be right with these “flop gotcha points”, and then you and other defenders of Krugman come in and say, “no, no, no, what Krugman *meant* was something entirely different from what he said,” which is only tangentially related, and a complete reworking of the point Krugman was making.

              • Daniel Kuehn says:

                Who tends to rely on what was literally said and who has to rely on reading between the lines?

              • Matt Tanous says:

                I’d still say Murphy tends to point out what was literally said more. When defending Krugman, you often add on things like “well, you forget the condition of X, Y, and Z, which is implied here”.

              • Daniel Kuehn says:

                I should have known not to ask that. If you think he tends to be right of course you think that. Doesn’t matter how many times I point out the plain English of Krugman’s writing.

                That’s why there’s a disagreement in the first place.

              • Ken B says:

                ” Doesn’t matter how many times I point out the plain English of Krugman’s writing.”

                Sure it does. That’s how many commenters here know you kill babies.

            • Bob Murphy says:

              DK wrote:

              So let me get this straight – if we just let you have your gotchas you’d stop writing them?

              OK you got me there.

  3. Tel says:

    Let’s suppose I am looking at a motor vehicle, and it is basically in good working order. I’m not going to tell you exactly which make and model, and yeah some cars are faster than others, some look cooler, some are bigger or smaller, but any working vehicle in good shape is going to have:
    * working ignition system
    * some fuel in the tank
    * brakes
    * clutch and gearbox
    * steering
    * reasonable amount of oil
    * some sort of cooling system
    * etc, etc…

    So now if something goes wrong and this car stops working, you might take it to a mechanic and she will go through each bit looking for what’s working and what’s not. After all there are a bunch of different things that can go wrong with a car.

    * Does the engine turn over?
    * Does it get fuel?
    * Does it get ignition?
    * Does the clutch engage?
    * etc, etc…

    Suppose you went to a different mechanic, and this guy (whose initials might be PK) says that you can fix any vehicle, any time, just put in a bigger battery. Yup, and if a bigger battery doesn’t fix it, then you need one that’s even bigger again. Really big, stimulate the heck out of it.

    If temporary fiscal stimulus does not jolt the economy out of its doldrums on a sustained basis, however, then a recovery strategy based on fiscal expansion would have to continue the stimulus over an extended period of time.

    So that was written by someone who apparently believes that there’s only one thing any economy could possibly need, regardless of what might have gone wrong — more stimulus. We don’t even need to ask about the symptoms, don’t need to check anything, just give it more stimulus.

    You wouldn’t take you car to a mechanic who behaved like that would you?

    A modern economy is a lot more complicated than a car.

  4. Major_Freedom says:

    Murphy, I just realized something (or not, tell me if you disagree).

    The bolded part you quoted from PK:

    Does this mean that fiscal policy should be ignored as part of the policy mix? Surely not. On the general Brainard principle – when uncertain about the right model, throw a bit of everything at the problem – one would want to apply fiscal stimulus. (Even I wouldn’t trust myself enough to go for a purely “Krugman” solution). However, it seems unlikely that a mainly fiscal solution will be enough.

    Call me crazy, but isn’t PK saying that the purely “Krugman” solution is fiscal stimulus? To me, PK is saying that he wouldn’t trust himself to recommend only fiscal stimulus if he is uncertain about the right model. That he would throw a bit of everything at the problem instead. When PK says “However, it seems unlikely that a mainly fiscal solution will be enough”, to me he is referring to the pure Krugman solution, not that the pure Krugman solution is monetary policy.

    • xgsmmy says:

      Call me crazy, but isn’t PK saying that the purely “Krugman” solution is fiscal stimulus?

      No, probably not, read this.

      • Major_Freedom says:

        I mean in that particular passage.

        • xgsmmy says:

          MF, right, if you read the section the passage is in: page 43-44 under “Policy options and their consequences”, Krugman seems skeptical of using just fiscal policy, not just because he doesn’t think it will done right, but because if it is done right it may result in an unacceptable level of debt.

          According to Krugman Japan had already been trying fiscal policy: the purpose of his paper was to suggest using more monetary policy.

    • Daniel Kuehn says:

      No, the Japan paper said that the solution to the liquidity trap is monetary policy that credibly commits to irresponsibility.

      That was the headline message. That was what the paper was so famous for saying.

      The last time anyone talked about a liquidity trap there were no New Keynesians around. Old Keynesians cared about expectations of course, but they never really did a very good job modeling it formally. Nobody did until the rational expectations revolution. So the Old Keynesians always used to highlight how monetary policy would not work in a liquidity trap.

      Krugman, a New Keynesian, sees a liquidity trap in Japan and is able to think about expectations in more formal terms, and says “look we always thought monetary policy was useless in these cases but it’s really not”.

      His solution was the credible commitment to irresponsibility.

      Liquidity traps are bad news. Fiscal policy can help monetary policy out. You can get this result in a lot of models. Krugman said that too.

      As far as I know this was Krugman’s view in 1998 and this is Krugman’s view today.

      • Major_Freedom says:

        Thanks, DK, that makes sense.

    • Bob Murphy says:

      MF wrote:

      Call me crazy, but isn’t PK saying that the purely “Krugman” solution is fiscal stimulus?

      You’re not crazy, just wrong. Krugman is saying (my paraphrase of course):

      “The one example in human history where fiscal policy conceivably could’ve helped a depressed economy is the US in the Depression, but even there, I would argue that it was the expectation of future inflation that did the heavy lifting, not FDR’s deficits. Anyway, I can do a very standard model to show why the promise of future inflation will lift an economy out of a liquidity trap. On the other hand, you have to have a weird model with multiple equilibria to even come up with a theoretical possibility of a big jolt of fiscal stimulus doing the same trick. Now, am I saying that we should *just* do monetary policy, and not run any deficit at all? Nah, I wouldn’t go that far–even *I* don’t trust my own judgment that much. It’s better to be cautious, like Brainard says, and throw in a bit of everything. So by all means, run budget deficits, but the important thing is to raise the public’s expectations of future price inflation.”

      • Major_Freedom says:

        Ok. Thanks for clearing that up. Saying it that way makes me see it.

    • Dan says:

      I had to reread that part because I was initially thinking the same thing as you, but that interpretation makes no sense. He says one would want to apply fiscal stimulus because he wouldn’t trust himself with a purely Krugman solution. That sentence makes no sense if he is saying that one would want to apply fiscal stimulus because he wouldn’t trust himself with a fiscal stimulus solution.

  5. Daniel Kuehn says:

    I’m not clear on what’s being devastated here.

    This does represent his current views, right? Aren’t his current views that we should do lots of monetary stimulus but because we’re in a liquidity trap and that really only acts on expectations we really need to add fiscal policy to the mix?

    Scott has been repeating that Krugman only like fiscal policy and doesn’t like monetary policy so much that he’s actually started to believe it himself.

    • Ken B says:

      Can anyone give a recent cite of PK opposing monetary stimulus? If DK is wrong this should be easy.

      • Daniel Kuehn says:

        We’ve documented (I believe through a back and forth between blogs) that “monetary stimulus” is regularly used by Krugman and DeLong to refer to “conventional monetary policy” or New Consensus/Taylor rule type stuff.

        I had a post showing that Sumner selectively quoted from DeLong, for example, and that if he quoted more of the post it would demonstrate that DeLong supported EXACTLY what Sumner was saying.

        But as for recent stuff, this post from Krugman might help: http://krugman.blogs.nytimes.com/2012/09/01/monetary-versus-fiscal-policy-revisited/

        He writes: “One recurring complaint from commenters on this blog is that they can’t figure out where I stand on monetary versus fiscal policy as a response to a deeply depressed economy. Sometimes, they say, I declare that monetary policy is ineffective once you’re at the zero lower bound; other times I berate Ben Bernanke for not doing more. Which is it?

        But it’s not a contradiction. Mike Woodford’s latest paper, especially taken in tandem with his paper last year at the Cambridge Keynes conference, actually explains it all.

        What Mike demonstrates is the point that liquidity-trap worriers have been making for a long time – actually, ever since my 1998 piece. Current monetary policy is indeed ineffective in a liquidity trap; but there is still scope for central bank action in the form of credible commitments to keep monetary policy easy in the future, when the economy is no longer at the zero lower bound.

        The trouble is how to make those credible commitments. Actually, it’s a two-stage problem. First you have to convince the central bank itself that it’s a good idea to signal that you won’t return to normal policy (say a standard Taylor rule) as soon as the economy lifts off from the liquidity trap; then you have to convince the private sector that the central bank will not, in fact, just revert to type once the crisis is past.

        My judgment back in late 2008/early 2009 was that it would take a long time to get through those two stages; indeed, as Mike’s paper makes clear, four years into the Lesser Depression the Fed is still inching up toward stage one. Meanwhile, the slump was already upon us.

        What about fiscal policy? As Mike pointed out in his earlier paper, fiscal stimulus in a liquidity trap doesn’t require that you convince the market that you’re going to behave differently once the crisis is past. It doesn’t depend on expectations at all; the government just goes out and creates jobs. So it made a lot of sense to argue for stimulus as the main immediate response to the slump.

        But isn’t fiscal stimulus also a hard sell politically? Yes, indeed – although the truth is that we did get some, and it probably had a major impact in softening the economic blow. And we would have had more if not for the scorched-earth opposition of Republicans, which is not a problem of economic analysis.

        So what should well-meaning economists do now, with both fiscal and monetary policy falling short? The answer is, campaign on both fronts, trying to convince influential players both that austerity is wrong and that the Fed needs to start signaling its willingness to see more inflation before it raises rates.

        And that’s more or less where I am.”

        I am astounded that after four years this point is still a mystery to people. I think a lot of it comes from guys like Scott Sumner repeatedly making the claim that Keynesians think monetary policy is useless in a depression. He’s living back in the 1940s at least, although I’m not sure it was even true back then.

        • Ken B says:

          Oh sure, quote PK directly on point and at length. Dammit Daniel. Won’t you ever just play fair??

          :)

          • Bob Murphy says:

            Ken B., if you haven’t clicked through and read what Krugman wrote, to trigger Sumner’s critique, then you are epistemically closed.

            The issue isn’t whether Krugman disagrees with Tyler Cowen. The issue is, he’s saying Tyler doesn’t know Macro 101, when Tyler’s view could be justified by citing Krugman 1998.

            if that doesn’t bother Daniel, I don’t know what to say.

  6. Transformer says:

    Isn’t Krugman’s post about his view that fiscal austerity while in a liquidity trap is bad policy? He clearly thinks that both fiscal and monetary stimulus are needed in that scenario. He presumably would have thought that “fiscal austerity” in Japan in 1998 was bad policy too , albeit it seems his own ““Krugman solution” was largely monetary in nature.

    • Bob Murphy says:

      Isn’t Krugman’s post about his view that fiscal austerity while in a liquidity trap is bad policy?

      Yes, that’s his current view, but Krugman 1998 disagreed. So if Tyler currently disagrees, you can’t dismiss him as dumb. You can just say he’s wrong, and ideally you do it with tender loving care because you yourself thought the same thing in 1998.

      • Transformer says:

        Can you point to something that indicates that Krugman ever disagreed iwith the view that “fiscal austerity while in a liquidity trap is bad policy?”.

        He does say ” But if one expects that at a sufficiently distant date real rates will become strongly positive again, the eventual size of that debt becomes an important concern.”

        But is there not a difference between 1) saying that the debt is a concern that needs to factored into policy and might lead one to favor monetary policy 2) saying that the debt is of such pressing concern that we need “fiscal austerity” immediately ?

        His post seems to be attacking view 2 and I am not seeing that as contradicting a view he ever had.

        • Bob Murphy says:

          Transformer:

          Can you point to something that indicates that Krugman ever disagreed iwith the view that “fiscal austerity while in a liquidity trap is bad policy?”.

          I’ve already pointed out what I think that would be, so I guess we disagree on its significance. We’ve got the Old Krugman saying you need a weird model to even theoretically hope fiscal policy will get you out of a liquidity trap, that the one possible historical example (Great Depression) actually isn’t so hot, and that the “Krugman solution” to a liquidity trap would be 100% monetary policy, 0% fiscal policy. And one of the explicit reasons given for this position, is that fiscal policy probably won’t cure the problem and will rack up an unacceptable level of debt.

          So how can someone who said all of the above back in 1998, now go ballistic when people who have called Scott Sumner “heroic” suggest that reining in budget deficits might be a good idea right now? That is a perfectly fine implication of Krugman 1998 views. Back then he was saying he would go along with some fiscal stimulus just in the interest of prudence. So we’ve done that now for 4 years, racking up tons of debt. Someone who loved Krugman 1998 could quite reasonably conclude, “This is too much debt, now is the time to rein in deficits and let’s put pressure on Bernanke to do more.”

          • Transformer says:

            If one reads the PK post it seems at first that he is just saying that anyone who thinks “fiscal austerity” is a good idea during a liquidity trap is ignorant of Econ 101 type stuff. This did not strike me as particularly contentious given his Keynsian model.

            Digging deeper it turns out that the post is aimed at Tyler Cowan for tweeting “If we won’t face up to the cliff at 2.7% gdp growth, when again are we hoping to face it?”..

            I am pretty sure that Cowan is also an advocate of increased monetary stimulus at the moment. So in effect he (Cowan) is calling for something not too distant from what Krugman wanted in Japan.

            So with that context I agree that he is being a bit fast with words in this post.

  7. Ken B says:

    Bob nailed PK on the epistemic closure thing. DK nailed Bob on this thread.

  8. Jonathan M.F. Catalán says:

    I don’t know if this has already been said, but I think Krugman’s interaction with Koo (they worked together on some papers), especially after Krugman’s Japan paper, may have pushed him towards advocating fiscal stimulus. Krugman still doesn’t completely agree with Koo, but the latter doesn’t think monetary policy works at all during balance sheet recessions. Krugman adopted the balance sheet recession concept for the Great Recession, so it makes sense that he emphasizes fiscal policy as much as he does monetary policy.

  9. Dyspeptic says:

    Ken B – “Sure it does. That’s how many commenters here know you kill babies.”

    Congratulations, you win the Smart People Say The Stupidest Things Award for the week.

  10. Major_Freedom says:

    Ok, Thanks for clearing that up. Saying it that way makes me see it?

  11. Kevin Donoghue says:

    From Bob’s update: “Scott pointed out that they could have justified their statements quite nicely by citing Krugman 1998.”

    Many thanks for that. At least now I know what your point is (and possibly Scott’s also). The thing is, though, you can’t justify Alesina’a argument by saying it would make perfect sense if he was a Market Monetarist. AFAICT he is nothing of the sort. Krugman was trying to make sense of actually-existing Alesina, not Scott’s modified and improved Alesina.

  12. Kevin Donoghue says:

    PS: that, BTW, was what I meant by Scott’s Carly Simon syndrome. You may have seen a more subtle joke than I intended. Scott has a way of seeing many of PK’s posts as jabs at Market Monetarism — a doctrine which, AFAICT, doesn’t bother PK very much at all. Krugman’s song is mostly about David Brooks, but NYT rules prohibit him from slagging his fellow columnist.

    • Bob Murphy says:

      KD I got what you were saying. By “subtle” I meant that you didn’t spell out “you think this is about you.”

  13. xgsmmy says:

    Bob, regarding the update I still think you’re wrong on this. Alesina and possibly Cowen are saying austerity now even though inflation is low.

    Krugman’s Japan papers were proposing an alternative to fiscal policy. You guys seem to think he thought in the absence on expansive monetary policy, Japan should not only not increase temporary spending, but presumably should cut planned spending, when neither is clear.

    The best that can be said for Cowen is if he thinks Bernanke will raise his inflation target based a deficit reduction deal even though that would seem to contradict Bernanke’s own public statements.

    • xgsmmy says:

      I have to start proofreading better and posting less.

      Even if Japan actually had higher inflation it’s not at all clear that Krugman was recommending anything specific on the cyclical budget.

      But here he is on fiscal stimulus: “True, since the economy is demand- rather than supply-constrained even wasteful spending is better than none.”

      So maybe there are two complaint: 1. In the case of Cowen maybe Krugman jumped to conclusions about what Cowen really believes. Cowen according to you guys thinks cutting spending is okay because Bernanke will just offset it with higher inflation.

      2. Krugman is guilty of writing about Japan situation in such a way that it has allowed his enemies to use his words against him in a different situation even though the post they are using his words against him on is saying the situation is different. That is at the time Krugman thought monetary policy was undervalued, so he can’t possibly think fiscal policy is undervalued now.

      His argument are remarkably similar, actually. On Japan he was saying for whatever reason they were unwilling or unable to use fiscal policy sufficiently so they should try this newfangled monetary policy. Now he’s saying for whatever reason the Fed is unwilling or unable to use monetary policy sufficiently so they should try the old way of doing things.

      Maybe the real criticism of Krugman is that what he may have been getting at is Scott’s point about monetary precedence: that monetary policy must accommodate fiscal policy. I’ve seen Delong state this as if he believes it but haven’t seen Krugman say it explicitly.

  14. Alex says:

    Bob, you’re trying to score political points here. It’s either incredibly disingenuous or you don’t understand Krugman’s stance. Textbook economics (Krugman’s macro 101) does indeed suggest that fiscal policy with interest rates at the zero lower bound is both effective and has a highly positive multiplier (i.e. there’s no crowding-out effect). Unconventional monetary policy (of the type advocated by Friedman, Bernanke, Sumner and, yes, Krugman) has theoretical support, but it’s a risky proposition. Krugman’s position is, and has been, that the possibility for unconventional monetary policy (influencing expectations, buying longer-duration assets, committing to open-ended QE until either inflation or unemployment reach a particular level) doesn’t mean that fiscal policy isn’t the primary weapon for policymakers when the economy is depressed and interest rates are at the zero lower bound.

    In context, what Krugman’s post says is that, in a depressed economy with interest rates at the zero lower bound, when unconventional monetary policy may (but only may) be effective, contractionary fiscal policy in the form of austerity is a disastrous idea, especially when the evidence that unconventional monetary policy works is purely theoretical at this point, while the contractionary impact of contractionary fiscal policy is well understood and backed by empirical data.

    With the power of Google, you can figure out what Krugman thinks of unconventional monetary policy and its relationship with fiscal policy, too. If you were to stop digging around and trying to score political points, you might find it…

    http://krugman.blogs.nytimes.com/2010/07/24/monetary-and-fiscal-policy-a-clarification/

    • Bob Murphy says:

      Alex wrote:

      Textbook economics (Krugman’s macro 101) does indeed suggest that fiscal policy with interest rates at the zero lower bound is both effective and has a highly positive multiplier (i.e. there’s no crowding-out effect). Unconventional monetary policy (of the type advocated by Friedman, Bernanke, Sumner and, yes, Krugman) has theoretical support, but it’s a risky proposition.

      Alex, with the power of Google, you will find Krugman in 1998 (or maybe 1999) saying the exact opposite of what you said above.

      • Blue Meme says:

        If that’s so, then why don’t you present a Krugman quote that supports your point — the quote Sumner presents really doesn’t.

        Even if you did find one, you’d be debating against the past. That tends to be a preoccupation of those who know they are outgunned in the present.

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