When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. … It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.”
Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we?
Then David adds the following comments:
Every single sentence in the above quote is correct. So why do I say that Krugman gets Hoover wrong?
Because contrary to the impression Krugman leaves the reader, and obviously wants to leave the reader, Hoover didn’t take Mellon’s advice. See more here.
That reminded me of this golden oldie from Krugman:
Mexico’s current president, Vicente Fox, a former Coca-Cola executive, is a firm believer in free markets. But his administration is widely considered a failure.
Notice he didn’t say Mr. Fox implemented neoliberal policies, which would be the natural way to make the point. Why not? Because all of Mr. Fox’s attempts to implement neoliberal policy reforms were blocked by the PRI, which controlled Congress. Of course Noah Smith believes Mexico has done very well under the 12 years of PAN rule (2000-2012), (although he recently updated the post with corrected data, which makes Mexico’s performance much less impressive.)
Today Krugman sort of took credit for the new Japanese monetary stimulus:
Let it not be said that the scribblings of academic economists have no effect. Some of us have been urging the Bank of Japan to get truly aggressive and adventurous on monetary policy “” and it’s happening!
And it only took 15 years.
Seriously, this is very good news. Japan is finally, finally making a real effort to escape from its deflation trap. We should all hope it succeeds.
I’m in the odd position of being in complete agreement with Krugman. It’s a great start, it’s already boosted market expectations of NGDP growth, but it’s still not certain to succeed in pushing Japan out of the zero rate bound. They might need even higher inflation.
Krugman cited a 1998 paper that was the first to provide a blueprint for this sort of policy shift. But why not cite more recent writings? And why not congratulate the Japanese for ignoring Keynesian Nobel prize-winning naysayers who suggested that monetary policy was ineffective at the zero bound? People like Joe Stiglitz, and . . . well, you judge for yourself:
Hmm. I see that Scott Sumner has a post heatedly attacking the idea that Japan is stuck in a deflationary trap; he insists that Japan has deflation because that’s what the Bank of Japan prefers:
I was under the impression that the Bank of Japan was an ultra-conservative bank, and liked mild deflation. Indeed I thought that was pretty widely understood. I guess not.
He guesses right: that’s not at all the view of those who have been following Japanese monetary policy since the 1990s, and have even talked to BOJ people now and then. I’m sorry to say that the fact is that Japan is in a deflationary trap. You can argue that the BOJ should have done more “” and I would. But persistent deflation isn’t a target, it’s what has happened because conventional monetary policy has lost traction and the BOJ isn’t willing to be more adventurous.
Now of course in a sense Krugman is correct. All they needed to do is become “more adventurous.” And of course I was arguing that Japan is not in a liquidity trap because all they needed to do is become “more adventurous.” Ryan Avent expressed amazement at Krugman’s logical contortions:
And…I’m genuinely mystified. The only thing I can think of that would square this circle is if Mr Krugman and I are using different definitions of the word “prefer”. As best I can tell, he has conclusively shown that Mr Sumner is right, and Japan hasn’t been in a deflationary trap. It just needs to fire all of its central bankers.
Much ado about nothing? Not quite, at the very end of the post Krugman makes an implied prediction:
Oh, and about the exchange rate: there’s this persistent delusion that central banks can easily prevent their currencies from appreciating. As a corrective, look at Switzerland, where the central bank has intervened on a truly massive scale in an attempt to keep the franc from rising against the euro “” and failed
Soon after that statement was made the Swiss decided to devalue, and then peg their exchange rate against the euro. And it worked.
I know that the usual Krugman defenders will come over here and insist I’m teasing him simply because I’m jealous of his Nobel prize-winning success and I’m at some no-name college. Krugman was right! Yes, I am a loser (aren’t we all) but I’m not particularly jealous of him. Indeed I have consistently praised him for correctly anticipating that the Fed would shy away from being “adventurous” in a zero bound trap, despite Bernanke’s “Rooseveltian resolve” comments. I expected more, and I was wrong. But when I consider how little “adventure” it would actually take to boost NGDP, I’m reminded of this Monty Python skit.
PS. Two Monty Python videos in a fortnight! Apologies to the millennials–you had to be there.