Krugman the Saucy Vixen Playing Hard to Get With Scott Sumner
Poor Scott Sumner. Little does he know, I will soon write a Mises Daily article that absolutely eviscerates his “interest-income-isn’t-really-income” posts. But then on top of that, Krugman gives him the cold shoulder today:
The truth is that it’s very hard for central banks to get traction in a zero-rate world. This doesn’t mean that they shouldn’t try. But nobody is sure how much effect quantitative easing will have on long-term rates; even a decade ago, I thought Ben Bernanke was too optimistic on that front, which is why I was more of an advocate of inflation targeting — yet I was also aware that making inflation targets credible is itself tricky. Furthermore, even if long rates can be reduced, how much effect will they have? Business investment is relatively insensitive to interest rates, mainly because equipment doesn’t have all that long a lifetime. Housing is the place where the rubber usually meets the road; but not in the aftermath of a huge bubble and vast overbuilding.
So I didn’t and don’t think that we can count on monetary policy to do the job; blithely declaring that the Fed should target nominal GDP misses the difficulties. And that means we need fiscal policy.
This is really getting out of hand. I know a lot of you folks have real jobs and you don’t keep tabs on Krugman’s latest stance vis-a-vis fiscal versus monetary stimulus, but that’s why you have me. I am not going to look it up, but trust me, Krugman has flip-flopped several times on this. Back when Obama first came in, Krugman was gung-ho about the need for big deficit spending.
Then, he gradually morphed over time until he sounded just like Scott Sumner. In fact–and here I’m not even kidding–I actually sent Scott an email saying something like, “Scott, I still think you’re nuts, but you actually managed to change Krugman’s mind. That’s impressive.”
And now, just like that, Krugman repudiates the Sumner Doctrine. And he doesn’t even have the courtesy to mention Scott by name. Nobel laureates have to keep up appearances, you know.
So I was wondering what could have prompted such a turnaround. Then I recalled a recent Sumner post that the ineluctable von Pepe sent me just yesterday, in which Scott opened like this:
Paul Krugman and Joe Stiglitz are brilliant Nobel-prize winning economists. Both have been known to be somewhat caustic in their criticism of others. Most importantly, both are public intellectuals who often criticize the orthodox establishment from a liberal or progressive vantage point. I used to think they were sort of similar.
Until now. In the field of macro, Krugman >>>>>>>>> Stiglitz.
For those of you who didn’t spend your adolescent years wishing you were an android, let me explain: Scott is saying that Krugman is a much much better macroeconomist than Stiglitz.
So I think we’ve solved the mystery. Scott ramped up the affection just a bit too much, and Krugman got freaked out and needed his space. Or, if you prefer Scott’s symbolic approach:
I know! Scott, you can make Krugman jealous by lavishing praise on some other hot-shot blogger. For example, you could say, “Maybe this Murphy guy has been right all along. Maybe diverting a trillion dollars in resources to investment bankers–the very people whose bad investments got us into this mess–is a bad idea. Maybe, just maybe, central planning is bad when it comes to the printing press too.”
Go ahead and try it, Scott. Krugman will be texting you in no time. “Scott u free 4 dinner 2 talk about M2?”
To what degree has Krugman really flip-flopped? I think Krugman has always been clear, and he has always supported fiscal deficit. Now, he has always supported monetary stimulus, as well. In some articles and blog posts he focuses on deficit spending, and in others monetary stimulus. Nevertheless, he has been pretty straightforward on how he would respond to the present financial crisis:
1. A large stimulus (I figure the size would be a function of the size of the output gap, as measured by the absolute change in GDP).
2. A large monetary stimulus to trigger long-term inflation, changing expectations. His numbers on this has changed. In my article “Krugman contra Hayek” I cite the figure $10 trillion, but I’ve also read some of his posts which suggests a smaller amount (although, still multiple trillions of dollars).
Jonathan, Krugman’s support for fiscal stimulus is always based on his assumption that (conventional) monetary stimulus won’t work.
http://krugman.blogs.nytimes.com/2010/07/14/nobody-understands-the-liquidity-trap-wonkish/
http://krugman.blogs.nytimes.com/2009/01/19/getting-fiscal/
Daniel,
I agree, to a certain extent, but that doesn’t invalidate anything I wrote. He has always called for both. Short-term fiscal stimulus to breach the output gap, with long-term inflation to change expectations.
Last year Krugman said:
“So some readers have asked why I’m not making the same arguments for America now that I was making for Japan a decade ago. The answer is that I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time.
OK, so what’s next? The second-best answer would be a really big fiscal expansion, sufficient to mostly close the output gap. The economic case for doing that is really clear. But Washington is caught up in deficit phobia, and there doesn’t seem to be any chance of getting a big enough push.”
http://krugman.blogs.nytimes.com/2009/11/13/its-the-stupidity-economy/
He basically admits that he thinks fiscal policy is the second best policy after monetary policy. I think this line, “The answer is that I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time” might explains why he has recently switched to promoting monetary policy over fiscal policy seeing how the slump has continued for a very long time since he wrote that.
I’d be freaked out too if I was Krugman. Scott Sumner used to many greater than signs. It looked more like an arrow than greater than sign. And two greater than signs is enough like X>>Y, adding more is meaningless.
Jonathan, I am not going to try to look it up right now. But really, Krugman had backed himself into such a corner that he actually had to put up a post explaining it to his readers, who were confused because they thought he had told them originally that monetary policy didn’t work.
You’re right in the sense that KRUGMAN never came out and said, “Whoops, I screwed up.”
But in general, it is very reckless for you to ask, “To what degree has Krugman really flip-flopped?” That’s like saying, “Are you really sure Olbermann was smug in that episode?”
Krugman flip-flops, but I have never personally seem him change his thoughts on this particular issue. However, it’s true that he is not as critical of a lack of fiscal stimulus as he is of a lack of monetary policy. What I mean is that he usually writes that monetary policy is ineffective, because the Federal Reserve is unwilling to target long-term inflation. However, he doesn’t have the same glum view on the likelihood of fiscal stimulus (although, if he did, he would throw up his hands and say the only politically viable solution is liquidationism — and I’m not sure that even Krugman can outright lie and say that).
Hi Jonathan,
Well you might be right. I asked Scott Sumner and he thinks you’re right; i.e. he doesn’t remember ever thinking that Krugman totally reversed himself. So maybe my memory is wrong, but I swear that there was a point when Krugman was basically agreeing with Scott and actually had to clarify to his readers why his views explaining the effectiveness of monetary policy were consistent with his earlier posts saying it was deficits or bust.