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!