A few days ago Paul Krugman gave three lectures at the LSE.  I have not heard the final lecture, but I thought I would make a few comments on the first two lectures.  As usual, I will focus on those areas where I disagree with Krugman’s views.  However I should also emphasize that I wouldn’t even waste time analyzing his views if I didn’t regard him as the closest thing we have to Keynes himself.  When Bob Murphy defended me to his Austrian readers with the line “finally, a man worth killing,” I took it as a compliment.  I won’t make the same remark vis-a-vis Krugman because we live in a “brave new world” where one can be arrested for making a joke while waiting to board an airplane.  So I’ll just say Krugman should take my obsession with his every utterance as a compliment.

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The conventional wisdom says that as the economy recovers we need to wind down the fiscal stimulus as quickly as possible.  Krugman makes a very persuasive argument that it is much too soon to pull back on fiscal stimulus, as the economy has not even started to recover.

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One of the things I find most frustrating about this crisis is the way my intellectual allies on the right keep shooting themselves in the foot, and thus unwittingly tend to discredit their otherwise defensible ideologies.  More specifically they continue to warn of high inflation, which is about the last thing we need to worry about right now.  In my previous post I tried to provide a psychological theory for these bad forecasts.  But whatever the reason, when these predictions don’t come true it will (unjustly) tend to discredit both the good and bad parts of their theoretical apparatus.

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JimP sent me this really neat video.  It’s the best explanation of the crash of 2008 that I have yet seen on video.  This shlocky, crude piece of pro-FDR propaganda from 1933 shows a more sophisticated understanding of the current crisis than what you get from 99% of contemporary economists.  As you watch, note the following similarities:

1.  The rise in the value of the dollar (1929-33 and late 2008) caused the price level to fall, and NGDP to fall even faster as output also declined.

2.  A policy of mild inflation will reverse this process.  NGDP, output, and employment will rise, and debts will be easier to repay as dollar incomes start rising again.

They knew that in 1933, why have we forgotten?  BTW, don’t tell me things are different now because we have a severe financial crisis.  They had one in early 1933 as well.  But at least they understood that their crisis was caused by falling nominal incomes, and not vice versa.

Today all we hear economists talk about is the symptoms of falling NGDP, not the causes.

Update 6/19/09,  I just noticed that Tim Cavanaugh at Reason had the same video.  Tim seemed slightly less impressed than I was.

Here’s how Paul Krugman answers that question (in an interview with Will Hutton):

WH: In Britain, there is now a new consensus forming that the government’s economic forecasts, which were roundly mocked at the time of the April budget for being wildly optimistic, could be right – that is, growth will start to resume in 2010, albeit at a very low rate.

PK: Well, the UK has achieved a lot of monetary traction in the way that no one else has through the depreciation of the pound. In effect, you’ve carried out a successful beggar-my-neighbour devaluation.

WH: So, the United Kingdom might actually get through this in reasonably good shape?

PK: Yeah. That’s why I’ve been watching with an outsider’s slight puzzlement, your bizarre political circus.

WH: Darling and Brown deserve more credit than they’re given?

PK: If the government can hold off having an election until next year, Labour might well be able to run as “we’re the people who brought Britain out of the slump”.

WH: So your advice to the Labour Party is: hold steady.

PK: Probably.

WH: Probably?

PK: I don’t know enough about the other aspects of politics, but I would guess that the option value is quite high that the economy might actually have turned a corner. That’s unique. That’s a uniquely British thing. None of the other G7 countries has anything like that.

WH: And that’s a combination of our big beggar-our-neighbour devaluation, aggressive monetary policy, successfully recapitalising our banks and our fiscal policy.

PK: There hasn’t been very much discretionary fiscal expansion when all’s said and done.

WH: Well, there was a £20bn temporary cut in VAT.

PK: Yeah.

WH: Which is non-trivial.

PK: Non-trivial. But not much [other spending], as I understand.

WH: Well, there was bringing forward £3-4bn of capital spending. Perhaps together in a full year the stimulus was 1.5% GDP. Maybe 2% at the outside.

PK: Monetary policy has been more aggressive – though maybe less than the Fed – and the depreciation of the pound is a nice thing from a UK point of view.

It’s good to hear that the one country that relied on an aggressive monetary policy, rather than fiscal stimulus, is doing better than the others.  Of course that’s been my argument all along.  I have little to add to Krugman’s comments except two brief points:

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