Define “like this”

Here’s Paul Krugman:

The Fed could and did cut rates, helping to cushion the impact of spending cuts. It can’t do anything like this now, because the Fed funds rate has already been cut more or less to zero in an attempt to fight the effects of financial crisis.

Austerity right now is a really, really bad idea.


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24 Responses to “Define “like this””

  1. Gravatar of Jason Jason
    8. February 2013 at 08:41

    “Do … this” refers to predicate in the previous sentence which is ” … cut rates”.

    It depends on your definition of “like” whether you consider these sentences to make sense from a monetary standpoint. Is cutting short term interest rates like cutting short term interest rates? Yes, definitely. Is quantitative easing (cutting longer term interest rates, or purchasing other assets) like cutting short term interest rates? Maybe, but it’s not obvious.

    I think our (in the US) entire predicament could be defined as the fact that cutting short term interest rates is not sufficiently like other kinds monetary stimulus. Assuming it is obvious these things are “like” each other is begging the question.

  2. Gravatar of Jason Jason
    8. February 2013 at 08:47

    (And I do realize the mechanism is expectations — I don’t think the expectations set by cutting short term rates is enough like expectations set by other kinds of Fed talk to make it obvious that these are “like” each other.)

  3. Gravatar of Jason Jason
    8. February 2013 at 08:51

    This is relevant:

    http://en.wikipedia.org/wiki/Representativeness_heuristic

    In making predictions, “cutting short term interest rates” has a population from which to make guesses about the future while e.g. quantitative easing does not. Other kinds of monetary stimulus will not cause people to make the same guesses about the future as announcing cuts in short term rates.

  4. Gravatar of Geoff Geoff
    8. February 2013 at 08:56

    Deep down I think Krugman likes liquidity traps, because that gives him more ammo to fight against his real enemies: anti-democratic socialists.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. February 2013 at 09:11

    Aren’t the spending cuts Krugman is talking about mostly long run (over ten years)?

  6. Gravatar of What if the ‘liquidity trap’ is a myth? | Historinhas What if the ‘liquidity trap’ is a myth? | Historinhas
    8. February 2013 at 09:14

    [...] Scott Sumner, Krugman has this to say: I’ve often argued on this blog and in the column that now is a [...]

  7. Gravatar of Vivian Darkbloom Vivian Darkbloom
    8. February 2013 at 09:20

    I wonder what “spending cuts” Krugman was referring to. Total government spending (nominal, federal and state) for the past 5 fiscal years has been and is projected to be (last two FY’s are estimates):

    FY 2007 $4.92
    FY 2008 $5.34
    FY 2009 $5.97
    FY 2010 $5.94
    FY 2011 $6.06
    FY 2012 $6.23

    http://www.usgovernmentspending.com/spending_chart_1985_2015USr_XXs1li111tcn_F0t_Total_Recent_Spending

    I don’t see much of a drop there to cushion, unless he’s referring to FY 2009 to FY 2010. If so, it doesn’t seem logical to take as a baseline a year with extraordinary fiscal stimulus included. Krugman is caught in a logical trap here: if fiscal stimulus would work as advertised, there would be no reason for the Fed to “cushion” taking away the punch bowl. And, if memory serves me, the Fed Funds and the discount rate were dragging bottom in late 2008–long before that government spending was “cut”.

    Deep down, I think Krugman likes liquidity traps because it allows him to make fallacious arguments that government spending needs to be increased even further.

  8. Gravatar of flow5 flow5
    8. February 2013 at 09:44

    Jan 28, 2013 p $2,522.6 T

    M1 non-seasonally adjusted @ $2,522.6T. The growth rate is too fast to be sustained. The Fed must tighten. Rates must rise immediately! This is a crisis!

  9. Gravatar of Jim Crow Jim Crow
    8. February 2013 at 10:19

    Geoff, I’d change that from ‘anti-democratic socialists’ to ‘warmongering non-progressives’ but I certainly like and get your point. I’ve read enough of Krugman to arm-chair psycho-analyze him as having been sincerely shocked and galvanized by the Iraq war. So, yeah, he uses a lot of rhetorical tricks to smite his enemies from a great spot to wage a flame war. But Scott’s posted enough of his earlier stuff to have long ago convinced me that there really isn’t that much daylight between his economics and Ben Bernanke’s who has complained about austerity as well, by the way.

  10. Gravatar of ssumner ssumner
    8. February 2013 at 10:27

    Jason. Reread the title of my post.

    In any case, regardless of how you interpret “like this,” the final sentence of his post is a complete non-sequitor. The fact that nothing “like this” can be done right now has no bearing on the question of whether something can be done.

  11. Gravatar of Cthorm Cthorm
    8. February 2013 at 12:05

    I can’t imagine how frustrating Paul’s comments are for you Scott. He plainly knows better.

  12. Gravatar of Brian Brian
    8. February 2013 at 13:37

    Vivian Darkbloom,

    I think the cut Krugman was referring to was the drop in military spending in the early 1990s in his blog entry, not the years for which you provided data. He presents a graph for Federal consumption and investment spending from 1986 to 1996 and then went on to claim that the drop in rates made that transition “easier”.

    Also, regarding the data set you provided, total government spending in real per capita terms began falling in 2009 and is projected to stay flat into the near future. This may be a strange way to think of government spending, but I think it does show if nothing else a decreasing share of the government’s contribution to AD.

    http://www.usgovernmentspending.com/spending_chart_1985_2015USd_13s1li111tcn_F0t_Total_Recent_Spending

    I do agree broadly with (what I think is) Scott’s point that Krugman is feigning ignorance of the role of unconventional monetary policy. More can and should be done in this regard and Krugman should be vocally supportive, but I do think Krugman is correct in asserting that little good can come from an acceleration of the austerity he fears.

  13. Gravatar of dtoh dtoh
    8. February 2013 at 14:09

    Scott,
    I’ll just paraphrase a comment I made on an earlier post.

    Most errors in monetary theory are a result of failing to correctly understand and distinguish between Tools, Mechanisms, and Targets.

    Tools – OMO and Fed Guidance.

    Mechanisms – Real prices of financial assets (1/ the expected real return) and expectations for NGDP growth.

    Target – NGDPLT

    The errors of New Keynesianism are: viewing interest rates as a tool rather than a mechanism, failing to recognize that real rather than nominal interest rates (prices) are the mechanism, and focusing on the wrong target …… RGDP rather than NGDP.

  14. Gravatar of Geoff Geoff
    8. February 2013 at 15:24

    Dr. Sumner:

    What specifically do you suggest the Fed buy to allow the Treasury to spend more on wars and spying, so that NGDP can be boosted?

    Sure, it’s clear that the more money that is printed and spent on war, the higher NGDP will go, and the more we can coax the unemployed into the empire making machine, but I am just wondering what specific securities you think would be sufficient for that, given that there may be some sort of debt problem in the economy (not sure though).

  15. Gravatar of ssumner ssumner
    8. February 2013 at 19:09

    dtoh, Yes.

    Geoff, Under NGDPLT the Fed would buy much less than today.

  16. Gravatar of Jason Jason
    9. February 2013 at 10:38

    Scott, I guess I misinterpreted what you meant by the title — I thought it was saying Krugman is wrong in saying you can’t do monetary policy (“like this”) at the ZLB when you can do something expansionary “like” Fed rate cuts, e.g. QE or higher NGDPLT or inflation targeting or whatever.

    The last line is not a non-sequitur … shorter Krugman: Last time we contractionary fiscal policy cuts we had Fed rate cuts to make it hurt less. This time we can’t have Fed rate cuts so [contractionary fiscal policy is a bad idea]. The last line of Krugman’s post is the part in the brackets.

    Saying nothing “like this” can be done right now was just used as support of not cutting spending, not to support that nothing at all can be done. For example, I am sure that Krugman would support cutting military spending if it was offset by deficit spending on social programs or infrastructure investment.

  17. Gravatar of ssumner ssumner
    9. February 2013 at 11:12

    Jason, I don’t know if you are sincere, or being cute like some commenters, but 99.99% of Krugman readers would clearly not have your interpretation. They would not assume he meant “The Fed could offset the effect, but it would have to be in a somewhat different way–say printing money. And they won’t offset it in that alternative way. Hence we should not do fiscal austerity.” If he wants to make that argument fine, but then make it. Almost no one would read Krugman’s post that way. If I said we should do fiscal austerity and offset it with monetary stimulus, 99.99% of Krugman readers would assume my views were contradicting his. But they would not do so, a syou point out. I’m confident he knows what he’s doing—the guy is a brilliant communicator.

    The title referred to the fact that he’s right in a narrow technical sense, but wrong in the way 99.99% of readers would interpret “like this.”

  18. Gravatar of Geoff Geoff
    9. February 2013 at 11:33

    Dr. Sumner:

    “Geoff, Under NGDPLT the Fed would buy much less than today.”

    How do you know this? Are you banking the entire argument on the effect that inflation and NGDP announcements have on inflation and NGDP?

  19. Gravatar of ssumner ssumner
    10. February 2013 at 13:21

    Geoff, Yup.

  20. Gravatar of Bob Murphy Bob Murphy
    10. February 2013 at 18:33

    Scott Sumner wrote:

    “If I said we should do fiscal austerity and offset it with monetary stimulus, 99.99% of Krugman readers would assume my views were contradicting his.”

    Yep. At first I couldn’t decide if you were being unfair to Krugman in this post, but you sealed the deal with that line. You are totally right on that, meaning Krugman is being slippery in his post.

  21. Gravatar of Krugman Bask Krugman Bask
    11. February 2013 at 08:05

    [...] I’m back on the job. In my absence (as I worked on a major deadline) my colleagues (1, 2, and 3) have picked up the slack, but now I’m back to keep Krugman’s toes to the [...]

  22. Gravatar of Krugman Bask – Unofficial Network Krugman Bask - Unofficial Network
    11. February 2013 at 09:07

    [...] I’m back on the job. In my absence (as I worked on a major deadline) my colleagues (1, 2, and 3) have picked up the slack, but now I’m back to keep Krugman’s toes to the [...]

  23. Gravatar of Scott Sumner Scott Sumner
    11. February 2013 at 13:51

    Thanks Bob.

  24. Gravatar of Krugman Bask « How to Articles Krugman Bask « How to Articles
    11. February 2013 at 21:51

    [...] I’m back on the job. In my absence (as I worked on a major deadline) my colleagues (1, 2, and 3) have picked up the slack, but now I’m back to keep Krugman’s toes to the [...]

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