Krugman’s double standard

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


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49 Responses to “Krugman’s double standard”

  1. Gravatar of Morgan Warstler Morgan Warstler
    28. April 2013 at 07:38

    Let’s assume Krugman has ulterior motive for Fiscal vs. Monetary.

    Let’s assume that even if Krugman BELIEVES Monetary will work, since that will make cutting fiscal easier, he’d never admit it.

    —-

    Ok how could Krugman get us out of this debate in a big bold stroke and prove he’s not the above guy?

    Krugman should say, “IF the Fed can hit 2.75% GDP Q2, I will renounce Keynesianism and outright endorse NGDPLT. ”

    He should wave a giant flag in front of the Fed and say “I don’t care if we cut govt. spending, just PROVE to me you can hit this target, and I’ll put my Nobel Prize to work day in day out telling NYT readers there’s no economic problem with cutting fiscal spending.

    But he won’t. Because deep down, like Obama on tax fairness, PK is not actually concerned with what makes economic pie go up and down, he’s concerned with the pie split, and govt. in his judgement is a proxy for fairness, less govt. = less fairness.

    WHY don’t econ bloggers admit this is who PK is?

    It dumbfounds me.

    There’s nothing rigorous about him at all. He’s not afraid Monetary doesn’t work, he’s afraid it DOES. And everyone knows it.

    PK is the Diederik Stapel of economics:

    http://www.nytimes.com/2013/04/28/magazine/diederik-stapels-audacious-academic-fraud.html?pagewanted=all&_r=0

  2. Gravatar of John John
    28. April 2013 at 07:39

    What would the world look like if fiscal stimulus was a total failure (as I actually think)? I could quite plausibly argue it looks much like the world today where Japan has run huge deficits for 20 years with no effect and the U.S. passed the largest stimulus ever and unemployment went above their worst case scenario projections. Yet somehow these facts serve to justify Keynesian theories for people with the worldview opposite from mine.

    Unfortunately real world events can never prove or disprove economic theory. Real world events are too complicated and have too many causal variables floating around.

    You see this same phenomenon regarding global warming. With so many potential drivers of changing temperatures and the underlying debate over whether change is cyclical or secular, there is almost no temperature data that could conclusively prove that temperatures are rising due to humans. Even if temperatures rose steadily year after year, it might be possible to point to non-human potential causes for the warming or to argue that it was a cyclical trend. The temperature of earth has changed a lot of the last few billion years.

    In complex situations, you have to resort to underlying theory or causal mechanisms. For instance, I believe in anthropogenic global warming because greenhouse gasses trap IR radiation. Other things equal, more greenhouse gasses should lead to warming temperatures. Just like economics, you have to qualify that with the “other things being equal.” They never are but it’s all you have to go on.

    Other things equal, fiscal stimulus simply represents a transfer of resources from private, voluntarily chosen uses that are subject to profit and loss calculation and into the hands of bureaucrats with a use it or lose it spending mentality. I think it is reasonable to deduce that it will not be spent very wisely.

  3. Gravatar of ML ML
    28. April 2013 at 07:49

    It seems to me that a fiscal stimulus was really a TOTAL failure, Japan would have 25 percent unemployment like Greece.

  4. Gravatar of John John
    28. April 2013 at 08:02

    The naivete on epistemological problems among very smart people is really, really striking. It is the only way that sincere people can look at the same data and draw the opposite conclusion.

    Here’s a post by Bob Murphy showing the different positions in this debate.

    http://consultingbyrpm.com/blog/2013/04/why-economists-will-soon-be-lynched.html

  5. Gravatar of Laurent Laurent
    28. April 2013 at 08:03

    In the previous thread, Prof Sumner mentioned:
    “You must be kidding. You are saying that the Keynesian model doesn’t explain movements in RGDP, but rather movements relative to forecast? Why would anyone take that model seriously?”
    In fact, I believe that was the whole point of the hyped Blanchard paper, “Growth Forecast Errors and Fiscal Multipliers”.

  6. Gravatar of Krugman takes a stab at market monetarists | Historinhas Krugman takes a stab at market monetarists | Historinhas
    28. April 2013 at 08:13

    [...] Update2: As does Scott Sumner [...]

  7. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    28. April 2013 at 08:52

    What is funny about all of this is that Krugman never denies that market monetarism is right.

    “I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot).”

    This is pure Nick Rowe.

    Btw, that’s not even true. They could print currency and mail it to people. Notice how odd it is that printing dollar bills is considered unorthodox monetary policy and really-complex-designed-to-obsfucate systems are mainstream?

    (Please don’t tell me that the expectation is that people would respond to it by putting more and more money in the freezer. It just does not pass the laugh test.)

  8. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    28. April 2013 at 08:56

    If someone showed me a graph on a modern economy with NGDP chugging along at 5% and a huge multi-year drop in labour participation, that would refute market monetarism.

    In the absence that counter-example, people are forced to argue things like “if you print more money, people will put it in freezers and the more you print, the more it ends up in the freezer; resulting in deflation.” They just use expressions like “liquidity trap” or “expectations channel” which hides teh ridiculousness of the argument.

  9. Gravatar of Gene Callahan Gene Callahan
    28. April 2013 at 09:14

    “whereas monetary stimulus is free.”

    TINFL

    Monetary stimulus is costly to all those currently holding money. It is a *current* tax on their money holdings.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2013 at 09:15

    ‘They could print currency and mail it to people.’

    Even easier, as Boldrin said in his debate with DeLong a few years ago, The Treasury/Fed could simply deposit into every personal checking account in the USA $10K…$20K…name the amount. You’d have had stimulus all right.

  11. Gravatar of ssumner ssumner
    28. April 2013 at 10:00

    ML, You are confusing real and nominal variables. Japan’s NGDP is lower than 20 years ago, perhaps the worst record for growth in aggregate demand in all of recorded history–at least in a developed economy. If unemployment is low, then that suggests the Keynesian explanation for Britain’s problems are off base.

    Laurent, That paper has no bearing on his comment, as the Fed was aware of the fiscal cliff when they did the forecasts for 2013. And the forecasters of Q1 GDP already knew about the fiscal cliff.

    Gene, Obviously I meant it doesn’t increase the deficit. It also increases net real income in the economy, so overall it’s a plus for the public as well, although drug dealers in Colombia do lose some purchasing power.

  12. Gravatar of Jon Jon
    28. April 2013 at 10:27

    Plus the FOMC has not been entirely consistent in promising more. Indeed when the first green shoots arrived, we immediately got treated again to a discussion of ending the indefinite purchases earlier than expected. Yes the economy started to sputter a bit again after that.

    Even if now the fomc is back on message, we are starting to face new headwinds with this talk of the experiment having failed. If that is accept the politicl pressures to tighten will win.

    Loose lips sink ships.

  13. Gravatar of Britmouse Britmouse
    28. April 2013 at 10:55

    Olivier Blanchard thinks fiscal stimulus is just a matter of arithmetic:

    On the U.S., one doesn’t want to do arithmetic exercises, but it is the case that arithmetically, if there was no fiscal consolidation—which would be wrong, there has to be some—, then growth would probably be between 1.5 and 2 percent higher than it is this year.

    This fight seems increasingly futile. Krugman talks about how he doesn’t cherry pick facts… and then failed to mention the UK CPI data when citing the failure of austerity, strangely. And we know he knows it, because he’s blogged about the “brave” BoE in the past.

  14. Gravatar of Travis Allison Travis Allison
    28. April 2013 at 11:43

    Here’s my attempt to put forward the strongest argument for PK’s position:
    ————————————————————-
    The Fed will tolerate 2.5% inflation if we reach that level, but won’t actively try to get there. So if the govt deficit spends enough to boost demand so that we get 2.5% inflation, this will reduce unemployment immediately and will reduce private sector debts. The Fed will not reduce the current open market purchases in the face of 2.5% inflation. If we change enough private sector debt to public debt through deficit spending, the private economy can then grow without further stimulus even if the Fed targets 2% inflation in the
    future. PK could argue that the reason why Japan failed with its deficit spending is that the BOJ targeted 0% inflation. So with such a low inflation target, the Japanese govt needed to do even *more* deficit spending to eliminate private sector debt. In other words, there should be some sort of (short-term?) correlation between the level of private sector debt and the level of inflation needed to produce a self-sustaining recovery. If private sector debts were close to zero (pretty much regardless of the level of govt debt) and inflation was 2%, we’d get self-sustaining growth in the
    private sector and we’d be free of the zero bound.
    ————————————————————-

    That’s my best attempt. I actually sorta like the link between the self-sustaining growth rate of inflation needed and the level of private sector debt. It’s speculative. When short term rates hit zero, is that an indication that we have too much private sector debt?

    Of course, even if the above is 100% true, that’s no reason to keep beating the drum for more fiscal stimulus. As Scott says, monetary policy is basically free while fiscal stimulus has to be paid with taxes in the future. It’s a no-brainer which one is better.

  15. Gravatar of Travis Allison Travis Allison
    28. April 2013 at 11:45

    The following page links to a pdf file that has some interesting charts exploring the relationship between private debt and growth:

    http://www.theatlantic.com/business/archive/2012/07/economic-growth-idea-forgive-or-restructure-debt-us-citizens-hold/260155/

    I think that too much is made of two or three data points.
    Furthermore, if you look at Italy, it had a lower level of private debt to gdp than Germany before the crisis. I think one could make an argument that the level of private debt to GDP that an economy can tolerate depends on an economy’s ‘natural’ growth rate. Thus one can’t focus on trigger levels that will hold at all times for all countries.

  16. Gravatar of Geoff Geoff
    28. April 2013 at 12:08

    “…whereas monetary stimulus is free.”

    I was GOING to say: I am very sorry, and with all due respect, with sincerity, with honesty, with charity, and with nothing but good intentions….I do believe that that statement right there has got to be one of the most reckless, dangerous, and wrong beliefs that anyone can ever entertain.”

    But then you said

    “Obviously I meant it doesn’t increase the deficit.”

    So close one. But it misses the mark, because the CB inflates by buying government debt. Debt and deficits are inexorably linked to inflation. If the government wants to inflate by $100 billion, then there has to be $100 billion of principal value of government debt available to buy. If the government threatens to inflate by a lot, and inflationary expectations rise, such that the government debt value falls, then the government is going to have to issue more debt if it is going to buy more of its own debt. The deficit is, therefore, a function of inflation.

    Yet you then said:

    “It also increases net real income in the economy, so overall it’s a plus for the public as well, although drug dealers in Colombia do lose some purchasing power.”

    Paper cash hoarders are NOT the only parties who lose purchasing power. Those domestic citizens whose incomes rise slower than the prices of the goods they buy, also lose purchasing power, on the basis that inflation from the central bank takes time to reach their sphere of activity through the process of exchange. Inflation is constrained to exchanges. If people don’t spend more, then prices can’t rise. Since people spend more over time only as their incomes rise (since their cash balances are not infinite, but limited), it means some people experience inflation primarily as rising prices.

    Inflation has costs so great that every single person in the division of labor incurs them, some more than others. The costs of inflation include, but are not limited to, the costs incurred in maintaining the centralized monetary system itself (police, jails, etc), the costs incurred by those whose incomes rise slower than prices, and, importantly, the costs incurred by everyone due to the unsustainable alterations to the capital structure of society, e.g. the wasted/destroyed capital during the resulting booms, the inevitable painful corrections, etc.

  17. Gravatar of Morgan Warstler Morgan Warstler
    28. April 2013 at 13:47

    I’ve pointed this out before…

    ANYTIME ANYONE advocated helicopter money…

    there’s an easy way to make sure it doesn’t harm the money holders…

    Just give the new money ONLY to money holders.

    Just keep handing it to them until finally one of them starts to spend it.

    Then offer to helicopter money IF and ONLY IF if gets done this way.

    Immediately the helicopter fans worry about inflation.

    There is nothing to learn about economics in this thread, only theft and self dealing.

    PK is a world class scumbag. Make him put his reputation down on a challenge to the fed…

    Ruin him.

  18. Gravatar of Bob Murphy Bob Murphy
    28. April 2013 at 14:03

    Scott wrote:

    “Meanwhile, government output in the US has been falling at the sharpest rate in decades, and yet NGDP keeps chugging along at 4%.”

    Scott, can you point me to the official data for this kind of claim? I’m having a really hard time pinning down exactly what you (and Krugman) are talking about. The stuff I see from CBO etc. suggests that total federal outlays will be higher in 2013 than in 2012.

  19. Gravatar of Negation of Ideology Negation of Ideology
    28. April 2013 at 14:29

    I find it strange to talk about “money holders” as a class of people. It’s like when we refer to consumers, producers, investors, creditors, debtors, taxpayers and users of government services as seperate classes of people – when in reality most of us are all of those things at the same time, or at least at some point in our lives.

    Every “money holder” got that money as a result of someone issuing it in the past, so how can they complain that someone in the present has the opportunity to get money that is newly issued? Why should I assume that the dollar the Fed issues hurts me as a “money holder” more than the interest savings from the bond it buys with that new dollar helps me as a taxpayer? Why should I assume that the extra purchasing power of the $100 or so of cash in my wallet from deflation benefits me more than the Depression hurts me as a job seeker?

    Why not just mange the currency in the way that is most beneficial to the citizens as a whole in a transparent way so we can plan our lives accordingly?

  20. Gravatar of Full Employment Hawk Full Employment Hawk
    28. April 2013 at 14:59

    Clearly the fact that output has grown so slowly that 5 years after the financial crisis the unemployment rate is still above 7.5% is a highly undesirable situtation. What we have had since 2010, when the Obama adminstration switched its priorities from economic stimulus to deficit reduction, is that we have had very contractionary fiscal policy (especially when the fiscal policies of the state and local governments, which are also relevant are included) that has not been sufficiently offset by expansionary monetary policy to bring down the unemployment rate at an acceptable rate.

    The relevant issues open to legitimate debate between Krugman style Keynesians and market monetarists are:
    1. To what degree is the insufficient expansionary monetary policy offset due to a lack of effort by the FOMC, and to what degree is it due to the fact that once the short-term rate has reached the zero floor, monetary policy becomes a lot less effective and more uncertain in its effects? (My repeated criticisms of the Fed for refusing to abide by its congressional mandate to achieve maximum employment indicates that I consider a lot of the blame to fall on the FOMC’s failure to do its job, but once the zero bound for very short-term interest rates is reached, expansionary monetary policy does appear to become more difficult and uncertain.)
    2. If we had not had the contractionary fiscal policy, would monetary policy have been sufficiently less expansionary so that NGDP growth had not been increased, or would a combination of monetary stimulus without the contractionary fiscal policy have led to greater NGDP growth? (I would conjecture that if the Obama administration had promptly filled the vacancies on the BOG with people who took the Fed’s mandate to seek maximum employment seriously AND had kept pushing for stimulus instead of switching the emphasis to deficit reduction, the unemployment rate would be a lot lower than it now is.)

    Clearly under the present political environment additional fiscal stimulus is not going to happen. The emphasis unde the current environment needs to be on making fiscal policy LESS CONTRACTIONARY and monetary policy more expansionary.

  21. Gravatar of Bob Murphy Bob Murphy
    28. April 2013 at 15:13

    John (2nd comment in this thread) wrote:

    “What would the world look like if fiscal stimulus was a total failure (as I actually think)? I could quite plausibly argue it looks much like the world today where Japan has run huge deficits for 20 years with no effect and the U.S. passed the largest stimulus ever and unemployment went above their worst case scenario projections. Yet somehow these facts serve to justify Keynesian theories for people with the worldview opposite from mine.”

    I know! Watch this:

    What would the world look like if monetary stimulus was a total failure (as I actually think)? I could quite plausibly argue it looks much like the world today where Japan has had huge expansions in its monetary base for 20 years with no effect and the U.S. Fed enacted the largest stimulus ever and unemployment went above the White House’s worst case scenario projections. Yet somehow these facts serve to justify Sumnerian theories for people with the worldview opposite from mine.

  22. Gravatar of Full Employment Hawk Full Employment Hawk
    28. April 2013 at 15:18

    “the U.S. passed the largest stimulus ever and unemployment went above their worst case scenario projections.”

    This was the first time a stimulus was used with an economy that had suffered a depression size shock to NGDP growth. Therefore a stimulus that would have been large relative to a run-of-the mill recession was not large relative to the huge shock the economy faced this time. Nevertheless output started growing by the Fall of 2009 and the unemployment rate started to come down in 2010. But since then fiscal policy has been contractionary, especially if the entire government sector, which is what is relevant for AD, is included. One can certainly make an argument that the contractionary fiscal policy, starting somewhere in 2010, has been effective in slowing the rate of growth of the economy, the way Keynesian theory predicts. And one can make a case that expansionary monetary policy has managed to keep the contactionary fiscal policy from bringing the economy into a second recession.

  23. Gravatar of Full Employment Hawk Full Employment Hawk
    28. April 2013 at 15:31

    During the Great Depression, the first Chicago School, which included Simmons and Viner, advocated that the Federal government run a deficit and finance it by printing money. They had the right idea. When the economy is hit by a depression level shock the issue should not be expansionary monetary policy VERSUS expansionary fiscal policy. What is needed to restore the economy to full employment at an acceptable speed is expansinary monetary AND expansionary fiscal policy.

    By not quickly filling the vacancies on the BOG with people who took the Fed’s mandate to achieve maximum employment serioulsly and by switching the economic priority from stimulus to deficit reduction in 2010, the Obama adminstration dropped the ball on short-term macroeconomic policy. Under normal conditions, Obama deserved to be defeated. But these were not normal conditions. What the right-wing extremist Republican party wanted to do was a lot worse for working people than what the Obama administration was doing. Therefore I went all out to support the reelection of Obama and the Democrats.

  24. Gravatar of psummers psummers
    28. April 2013 at 15:35

    Scott,

    You say that PK “gratuitously lumps [market monetarists] with wacky MMT’ers” but I don’t see that at all. Far from it, in fact. He says that the MMT folks attack Keynesians from the left, while you [mkt monetarists] attack from the right. He also emphasizes that (at least in his view) MMT & IS-LM are equivalent at the ZLB. Unless you think gratuitous lumping is equivalent to being mentioned in the same paragraph, I think you’re being unfair.

    Plus, my impression is that PK’s been pretty dismissive of MMT but has given you guys a pretty fair hearing, though of course you’ll disagree about his conclusions.

    FWIW,
    PS

  25. Gravatar of Paul Andrews Paul Andrews
    28. April 2013 at 15:50

    Keynesianism vs. Monetarism.

    Counterfeit Head vs. Counterfeit Tail.

    Keynesians spruik Perpetual Motion Machine Mark I. Monetarists spruik Perpetual Motion Machine Mark II. Both in reality are Gov-corp crony franchises leeching taxpayer resources.

  26. Gravatar of ssumner ssumner
    28. April 2013 at 16:19

    Bob, You said;

    “Yet somehow these facts serve to justify Sumnerian theories for people with the worldview opposite from mine.”

    Some of us predicted that the big increase in the monetary base would have only a tiny impact on inflation . . .

    . . . and some of us didn’t.

    In any case, the true test is how it affected expectations.

    Government output is different from government spending. I read that Gov. output fell very sharply in the recent two quarters, the most in many decades, but didn’t see the data first hand.

  27. Gravatar of ssumner ssumner
    28. April 2013 at 16:27

    psummers, I think it’s fair to say that almost everyone would interpret the phrase “a couple of sideshows” as lumping us together in a dismissive fashion.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2013 at 16:35

    The last I checked the Fed had not implemented a policy of nominal GDP level targeting (NGPLT), so when it does, perhaps then we can talk about what NGDPLT has or has not done. However what I do think we’re witnessing is a test, albeit a somewhat complicated one, of the existence or nonexistence of the liquidity trap.

    The four largest currency areas at or near the zero lower bound in central bank policy interest rates are the United States, the Euro area, Japan and the United Kingdom.

    The Fed dropped it policy rate to 0.25% in December 2008. Since August 2008 the Fed has increased its monetary base by 341%. The ECB had its policy rate as high as 1.5% in October 2011 but it has been at 0.75% since July 2012. Since August 2008 the ECB has increased it monetary base by 52%. The BOJ has had its policy rate at 0.1% since October 2010 but it has been below 0.5% since 2008. The ECB’s monetary base has increased by 53% since August 2008. The BOE has had its policy rate at 0.5% since March 2009. The BOE’s monetary base has increased 435% since August 2008. So it would appear that since 2008 the Fed and the BOE have expanded their monetary policy stance the most and the eurozone the least.

    Two ways of measuring fiscal policy stance that Krugman has referred to recently in his blog are general government expenditures as a percent of potential GDP (“American Austerity, An Update”), and the cyclically adjusted primary balance (“Self-destructive Europe”).

    The IMF projects that between 2009 and 2013 general government expenditures as a percent of potential GDP will fall from 41.6% to 37.8% in the US (a decrease by 9.2%), will fall from 49.6% to 48.0% in the eurozone (a decrease by 3.3%), will increase from 37.4% to 40.9% in Japan (an increase by 9.3%) and will fall from 46.2% to 43.8% in the UK (a decrease by 5.1%).

    By definition aggregate demand is nominal GDP (NGDP). Thus the impact of monetary and fiscal policy can be measured by looking at the change in NGDP. The IMF projects that from 2009 to 2013 that NGDP will increase by 16.2% in the US, by 7.6% in the eurozone, by 1.9% in Japan and by 12.5% in the UK. The IMF also projects that from 2009 to 2013 that real GDP (RGDP) will increase by 8.5% in the US, by 2.5% in the eurozone, by 7.8% in Japan and by 3.6% in the UK. So AD increased the most in the two currency areas that have expanded their monetary policy stance the most and have contracted their fiscal policy stance the most (by this measure). The change in RGDP suggests that Japan and the UK have had an increase and a decrease in aggregate supply (AS) respectively.

    The IMF also projects (according to the latest IMF Fiscal Monitor) that between 2010 and 2013 the cyclically adjusted primary budget balance as a percent of potential GDP will increase by 4.0% in the US, will increase by 3.8% in the eurozone, will decrease by 1.4% in Japan and will increase by 3.6% in the UK.

    The IMF projects that from 2010 to 2013 that NGDP will increase by 12.0% in the US, increase by 4.6% in the eurozone, decrease by 0.4% in Japan and increase by 7.5% in the UK. The IMF also projects that from 2010 to 2013 that real GDP (RGDP) will increase by 6.0% in the US, by 0.5% in the eurozone, by 3.0% in Japan and by 1.8% in the UK. So again, AD increased the most in the two currency areas that expanded their monetary policy stance the most, although their fiscal policy stance has contracted about as much as the eurozone’s (by this measure). And again, the change in RGDP suggests that Japan and the UK have had an increase and a decrease in AS respectively.

    The bottom line is that I see no evidence of a liquidity trap.

  29. Gravatar of OhMy OhMy
    28. April 2013 at 17:54

    “Fiscal stimulus is costly, as it increases the burden of future taxes, whereas monetary stimulus is free.”

    Someone needs to read up on MMT. Taxes do not fund spending. The first statement is a non-sequitur. No higher taxes in the future, unless aggregate demand will be excessive, in which case higher taxes stabilize prices, and have no real effect of constraining otherwise possible consumption.

    Monetary stimulus is indeed free, just an asset swap, which carries additional feature: it doesn’t do anything. Because if the private sector wanted, it can do such stimulus on its own: a rate targeting CB will allow it to swap all bonds into reserves as the private sector desires.

  30. Gravatar of OhMy OhMy
    28. April 2013 at 17:55

    “Krugman gratuitously lumps us in with the wacky MMTers.”

    Umm, actually no. He said MMs are wrong, the jury on MMT is still out.

  31. Gravatar of OhMy OhMy
    28. April 2013 at 18:23

    On the bright side: Scott Sumner regretted not being on Noah’s list of people crushed by Krugtron. Here ya go, enjoy.

  32. Gravatar of Bob Murphy Bob Murphy
    28. April 2013 at 18:27

    Scott,

    *sigh* I might be dumb, Scott, but I’m not as dumb as you apparently think.

    I wasn’t directly criticizing your worldview in my comment above. Rather, I was responding to John, who couldn’t understand how Krugman could possibly still think he had a leg to stand on. John pointed out that we had tried the biggest stimulus in history, and yet the economy still was in the crapper.

    So, since John (I think) believes you are the man, I pointed out that I could use the exact same approach to wonder aloud how Scott Sumner could possibly think he still had a leg to stand on.

    In that context, you pointing out that you were better on (price) inflation than me just proves my point: Krugman could say the same thing.

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2013 at 19:09

    I see a couple of errors.

    When referring to the change in the BOJ’s monetary base I said “ECB” by accident. It should be clear from the context what I meant. But just in case it is not clear, the BOJ’s monetary base has increased by 53% since August 2008.

    Also, the increase in the Fed’s and the BOE’s monetary base since August 2008 is actually 241% and 335% respectively. (Obviously I forgot to subtract the base amounts.)

  34. Gravatar of David Beckworth David Beckworth
    28. April 2013 at 19:24

    Bob Murphy,

    Total federal government expenditures are down in absolute dollar terms: http://research.stlouisfed.org/fred2/series/W019RCQ027SBEA

  35. Gravatar of Benjamin Cole Benjamin Cole
    28. April 2013 at 19:39

    Excellent blogging.

    BTW, some states do much better in the federal subsidy sweepstakes than others—indeed, a state like North Dakota gets $20k net per capita in federal outlays, while larger states are often net losers, or today, small gainers.

    Thus, fiscal policy becomes incredibly politicized, with small states (think two senators, population under 2 million) reaping huge rewards. In some regards, fiscal policy is just small states taxing income into themselves from large states.

    Monetary policy is more “fair” in this regard, allowing the private sector to allocate new money.

    As for those who complain about losses to holders of cash from Market Monetarism, I say so what. Who holds cash? Why is cash thought to be a store of value? As soon as cash becomes a store of value you get deflation and perma-recession, ala Japan.

    On top of everything else, the market is trying to send a signal now: We do not need your savings. If you insist on saving, you will lose the value of the your savings over time.

    But savers (in the layman’s sense of the word) seem to think themselves an entitled and sacrosanct caste, who must be coddled and protected at all times.

    Bond buyers, equity investors, property buyers all take risks in the marketplace, often to create new business and technologies. If we want to coddle anyone, it would be people who risk capital, not those who seek government-insured deposits but high yields.

  36. Gravatar of maynardGkeynes maynardGkeynes
    28. April 2013 at 20:29

    Please explain why drug dealers in Colombia are the only ones to lose purchasing power when there is inflation. What about people who hold “cash” in savings accounts or mm funds?

  37. Gravatar of Bob Murphy Bob Murphy
    28. April 2013 at 21:41

    David Beckworth, thanks, but I think there are different concepts getting thrown around in these discussions. I am pretty sure BEA means “consumption and investment expenditures” by that term, meaning it doesn’t include transfer payments. However, in that case I can’t understand how it could be $3.8 trillion (which is too high). Something doesn’t add up between the CBO and the BEA numbers…

  38. Gravatar of Bob Murphy Bob Murphy
    28. April 2013 at 21:43

    maynardGkeynes wrote:

    “Please explain why drug dealers in Colombia are the only ones to lose purchasing power when there is inflation. What about people who hold “cash” in savings accounts or mm funds?”

    Or for that matter, people who hold US Treasury securities. I think there are some people in Asia who hold a decent amount of dollar-denominated assets.

  39. Gravatar of Mike Sax Mike Sax
    29. April 2013 at 00:42

    Here’s the question though. Even if you think the Fed is offsetting the sequester-my guess is it may be doing it partly are we better off with:

    1. The Evans Rule, QE3 and the sequester.

    2. The Evans Rule, QE3 and no sequester.

    If you choose 2, then you have the Keynesian point.

  40. Gravatar of ssumner ssumner
    29. April 2013 at 04:58

    Mark, Great comment. I’m afraid MMTers like OhMy won’t read it, and wouldn’t understand it if they did.

    Bob, I’ve never regarded you as “dumb.” But I sometimes have difficulty understanding your comments.

    Maynard. Regarding non-cash assets, it depends on whether the inflation is unexpected or expected. If expected, then they are compensated via the Fisher effect. Obviously creditors (savers) can be hurt by unexpected inflation, but that’s not happening.

    In the long run only cash holders are directly hurt by inflation, not savers–except via the higher real tax on saving.

  41. Gravatar of Geoff Geoff
    29. April 2013 at 06:19

    Dr. Sumner:

    “Obviously creditors (savers) can be hurt by unexpected inflation, but that’s not happening.”

    1. Merely (correctly) expecting inflation that is going to happen is not sufficient to avoid being harmed by that inflation.

    Does (correctly) expecting to be robbed in the future, imply that one can avoid the costs of being robbed once the robbery occurs? No. And why not? Because correctly expecting a future event doesn’t imply that one has avoided that future event.

    Your reasoning reminds me of Hayek’s crazy social belief that coercion only occurs if it is unexpected.

    2. Unexpected inflation *is* happening. There are individuals who did not expect certain prices of certain goods to rise as much as they did. Nobody is a perfect predictor of price inflation. Inflation is caused by non-market whims of central bankers. One can’t perfectly predict what they will choose.

  42. Gravatar of Full Employment Hawk Full Employment Hawk
    29. April 2013 at 07:56

    2. The Evans Rule, QE3 and no sequester.

    When the economy is in a depression, even a little depression, a combination of expansionary monetary AND expansionary fiscal policy is optimal.

  43. Gravatar of Full Employment Hawk Full Employment Hawk
    29. April 2013 at 08:39

    “The bottom line is that I see no evidence of a liquidity trap.”

    It all depends on what the meaning of the term “Liquidity Trap” is. Using the term the way Keynes had introduced it, that when there is a liquidity trap, monetary policy becomes completely ineffective, we are clearly not in a liquidity trap. (And Keynes did not think this had happened during the Great Depression.) But reading the debate on this issue, it is clear that this is not always the way the term is used. For example, Krugman often refers to being in a liquidity trap when THE INTEREST RATE has reached a zero floor, which is clearly not presently the case for many longer-term interest rates that affect aggregate demand, so that uncomventional monetary policy can lower these rates. He also has, at times, argued that we are in a liquidity trap when the natural rate of interest becomes negative. This permits expansionary monetary policy to work as long as the interest rate needed to increase output IN THE DIRECTION OF POTENTIAL OUTPUT has not become negative.

    What we appear to be in currently is a SEMI LIQUIDITY TRAP: Very short term interest rates have become zero, making conventional monetary policy ineffective and alterantive monetary policies more difficult and uncertain but still effective if used agressively enough. Since the Fed is not willing to agressively use unconventional monetary policy to successfully control the rate of NGDP growth, Keynesian fiscal policy affects output both in the upward and downward derection, and since 2010 this has been in the downward direction.

    With fiscal policy in the United States being very contractionary, a good case can be made that the Fed’s monetary policy, which has led to a huge growth in the monetary base, deserves much of the credit for keeping the economy growing. What remains to be determined by research is how much of the growth is due to expansionary monetary policy and how much to the workings of the self-restorative properties of the economy. Except at the beginning of the little depression it cannot be due to fiscal policy which has been contractionary for most of thie period.

  44. Gravatar of adg adg
    29. April 2013 at 08:52

    When you are proven wrong, you can either be humble and accept defeat or look for obscure sources and empirical studies that match your belief. Keynes was once again proven right.

  45. Gravatar of ssumner ssumner
    29. April 2013 at 09:16

    adg, When the debate is about issues that are way over your head, sometimes it’s best to just remain quiet. Comments like yours just make Keynesians look stupid, and hurt your cause. I’m saying this for your own benefit.

  46. Gravatar of They Come not to Praise Market Monetarism, but to Bury It | Uneasy Money They Come not to Praise Market Monetarism, but to Bury It | Uneasy Money
    29. April 2013 at 09:29

    [...] some reason – maybe he is still annoyed with Scott Sumner – Paul Krugman decided to channel a post by Mike Konczal purporting to show that Market Monetarism has been [...]

  47. Gravatar of W. Peden W. Peden
    29. April 2013 at 09:44

    OhMy,

    So fiscal stimulus is not costly, except insofar as it requires higher taxes in the future? Right…

  48. Gravatar of Floccina Floccina
    29. April 2013 at 13:12

    Though a Noble prize winner Paul Krugman does not seem to have a particularly high rationality quotient.

  49. Gravatar of ssumner ssumner
    29. April 2013 at 17:47

    Floccina, I think he’s brilliant, but I also think Cowen’s recent juxtaposition of him and Miles Kimball (on fairness) nails it.

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