26 Nov 2012

What’s Krugman’s Transition Vision?

Krugman 9 Comments

Predictably, people reconciled Krugman’s two wildly divergent opinions on the dangers of the US inflating its way out of debt by saying we weren’t in a liquidity trap in 2003. Okaaaay, but can someone ask him politely (I don’t think he will listen to suggestions from me) to devote a future blog post to the transition? I.e., explain to me how there can be a worldwide strike by investors in US Treasuries that causes the dollar to depreciate and price inflation to spike, but then after we reach full employment suddenly investors are A-OK again with lending to Uncle Sam and interest rates go back to normal? And also, that this comforting of the investors won’t require painful austerity measures (the kind that sent unemployment in France to 11% in 1927, when they had to deal with stabilizing the franc after following Krugman’s advice two years earlier)?

I’m not being sarcastic. The CBO forecast of the US debt/GDP shows it going up and up. Everybody, including Krugman, admits there is a long-term fiscal imbalance. So I’m seriously wanting Krugman to spell out his vision for how this thing plays out, such that we get a bond strike that rescues us from the liquidity trap, but then turns on a dime so that we don’t run into the monetizing-the-debt-is-bad scenarios that Krugman himself spelled out so eloquently theoretically (when criticizing the MMTers) and as a real-world alarm (when criticizing the deficits of the Bush Administration in 2003).

9 Responses to “What’s Krugman’s Transition Vision?”

  1. Transformer says:

    I don’t think that Krugman thinks the current level of debt is a problem Indeed, I think he believes a much larger debt is needed to “end this recession now” and could easily be managed when the economy returns to normal. He cites the post-WW2 debt as an example of a debt “America owed to itself” and how that was not a problem. He states hat all is needed is a growth in the tax base that grows faster than the rate of interest and the debt can be painlessly rolled over for ever.

    I think the “bond vigilante would be a good thing” aspect is not really a prediction of what he expects to happen, but just an “even if you guys are right (and I don’t think you are) and we are in danger of attracting bond vigilante’s it would be a good thing because it would raise inflation expectations which would be stimulative” kind of thing.

    I agree that his views that the size of the debt will not be a problem even after the recession is over are in contradiction to the 2003 article you quoted in the other post where much smaller increases in debt seemed to be about to create hyperinflation. Seems that this part of his argument is based on his definition of what constitutes “sound governance” (or perhaps just on who is doing the borrowing).

    • anon says:

      Agree that Krugman isn’t saying this is going to happen, only that if it did what it would mean.

      I don’t think his story is just about higher inflation, though, but increased exports or buying of domestic goods from a lower valued dollar.

  2. anon says:

    Bob, I said this before, but supposedly the French inflation had already subsided by 1926 with a balanced budget but then the French pushed the budget into surplus and used the surplus to appreciate the Franc. When they ended the appreciation the economy recovered and some people claim the low valued Franc helped the French resist the great depression. (Although, I can’t find much information about the 1927-1931 period, and there are competing interpretations.)

    The long term fiscal imbalance is almost entirely about health care costs. Get health care costs (which are even higher in the private sector, so a drag on the economy) in line with other countries and suddenly you don’t have a long term fiscal imbalance.

    The argument about the Bush tax cuts is I think that interest rates still had room to fall, so it was irresponsible to cut taxes in any case, but as others have pointed out Krugman admitted he was wrong and has probably changed his views about how the economy works. (I think Dean Baker believes we not even at full employment during the Bush years, so higher deficits would have been possible.)

    In any case it is certainly possible that there will be some austerity when we’re back to following some kind of Taylor rule (assuming Scott Sumner’s NDGP revolution fails), but even if there’s a need for another Volcker to stamp down inflation, remember Krugman believes recoveries from Fed induced recessions are much quicker than “financial” crises. (Financial crises should read collapsed housing bubble.)

    • anon says:

      To clarify, I think the interpretation of the the low valued franc helping the French with the depression was about two things.

      One the Franc was perhaps undervalued so it helped to crowd-in investments: people thought they were getting a good deal.

      It was not increased exports so much as the French not being reliant on imports: so that when their exports declined they spend more money domestically.

    • anon says:

      And as Krugman said the French situation: low unemployment, high inflation, low valued currency was different than our situation today: high unemployment, low inflation, high dollar trade deficit.

  3. Gene Callahan says:

    Now *this* is a good question, Bob, and one I’d like to see Krugman answer as well.

    • Bob Murphy says:

      This was implicit in my previous questions, Gene. But I can spell it out for everyone if I must. It’s good that you keep me honest.

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