Paul Krugman has a new post that fails on every level possible.
as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.
And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.
Let’s start with the obvious double standard, identified by one of my commenters (Hellestal):
During 2009, the administration came up with a stimulus plan to fight the downturn in the economy. Keynesians like Krugman said, clearly and repeatedly, that the plan was in the right direction but that it would be insufficient to fight the downturn.
After the plan “failed” — for whatever reason — there were some who blamed Krugman for having advocated stimulus. Keynesian had been tested, they said, and it had failed. Krugman denied this, pointing out (correctly) that he had been saying from the beginning that the plan could be too small to make a difference. He linked repeatedly to his old posts, where he explicitly mentioned the possibility that the plan was insufficient. He vigorously defended the viewpoint that this “test” of his views was not proper.
Now we have Mike Konczal saying that market monetarism has been tested. We can, once again, go back to the original posts of the market monetarists to see what expectations they had. We can, once again, compare the actual policy that was implemented against what the original recommendations were. A brief search will indicate, once again, that the monetarists — like Krugman before them — believed that the plan was in the right direction but insufficient.
We remember, yet history still manages to repeat itself.
Ah, there is a difference. This time, Krugman is saying “we are in effect getting a test of the market monetarist view right now”. This is a rather ostentatious double standard.
But it’s even worse. Fiscal stimulus is costly, as it increases the burden of future taxes, whereas monetary stimulus is free. Indeed monetary stimulus actually reduces the burden of future taxes. So it makes some sense to talk about the “effort” that fiscal policymakers put into stimulus, but no sense to talk about monetary policymakers “making an effort.” The analogy for monetary stimulus is steering a ship. It’s not “how hard should they try,” it’s “which direction do they want to go?” The Fed believes their policies will lead to roughly 5% NGDP growth; hence they don’t want to do more. I think they overestimate the effect, and want them to do more. But that difference of opinion has nothing to do with the validity of market monetarism.
But it’s even worse. RGDP growth (which is what the Keynesians focus on) actually accelerated in Q1. The sharp slowdown predicted by the Keynesians failed to occur. But they are so convinced by the accuracy of their model that they simply assume that a sharp slowdown occurred because by God it should have occurred. I really can’t understand how any thinking person could take Krugman’s “proof” of Keynesianism seriously. BTW, the Keynesian model implies they should be focused on NGDP as an indicator of aggregate demand, as supply-side factors also impact RGDP. This leads me to wonder whether Keynesians even understand their own model.
In any flawed model there’s usually a grain of truth. The Fed presumably did enough stimulus to offset the fiscal contraction they expected in 2013. But if the sequester turns out to be more than the Fed expected then growth will slow in Q2, as the Keynesians predict. Then the Fed will have to do another monetary offset. But this is all a sideshow, over longer periods of time the Fed is driving NGDP, and that’s where Mr. Krugman should be focusing his attention.
Of course none of this has anything to do with the validity of “market monetarism”. At best it addresses one implication of market monetarism, the “monetary offset” claim. But regardless of whether the Fed does or doesn’t offset the effect of fiscal austerity, the fact remains that monetary stimulus is the only plausible solution to our demand shortfall, as fiscal stimulus isn’t even being considered.
PS. Krugman gratuitously lumps us in with the wacky MMTers. I’m sure Krugman knows better, he’s a very bright economist.
PPS. For those who (wrongly) insist on judging the stance of monetary policy by “gestures,” consider that the Fed has been much more aggressive than the ECB and BOJ, and of course US NGDP has grown much faster than in those two economies. So why not do even more?
PPPS. Meanwhile, government output in the US has been falling at the sharpest rate in decades, and yet NGDP keeps chugging along at 4%. So is Keynesianism a model that applies to the UK, but not the US? Or have we had monetary offset?
HT: Michael Darda