Good pragmatism, bad pragmatism

Matt Yglesias comments on Paul Krugman throwing in the towel:

Paul Krugman says he used to consider himself a “free market Keynesian” but doesn’t anymore after watching the failure in practice of unconventional monetary policy or discretionary fiscal policy to stabilize the macroeconomy.

I also find this disheartening, but I don’t really understand where it leaves us. Krugman says “the political economy of policy turns out to make an effective fiscal response to depression very difficult.” I agree. And he says “the Fed hasn’t ever been willing, or felt that it had sufficient political room, to do that experiment.” I also agree. So then he concludes:

At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. And I don’t just mean banking regulation; as the authors of the linked paper say, the logic of this argument calls for policies that discourage leverage in general, capital controls to limit foreign borrowing, and more.

Those sound like good ideas to me. But “sharply limit borrowing during good economics times” doesn’t strike me as any less politically challenging than “use fiscal and monetary policy to lift the economy during bad times.”

I applaud Krugman for keeping an open mind and rethinking his assumptions.  I was too optimistic about the willingness of the Fed to stabilize NGDP.  But I’ve drawn different conclusions from my failure.

When Krugman argued for fiscal stimulus because we weren’t likely to do monetary stimulus, I suggested that that was how banana republics behave.  Going to a third best policy is even worse.  In addition to the political barriers mentioned by Matt, there are also more and more unforeseen side effects when you go to second, third and fourth best policies.  That’s not to say everything Krugman proposes is wrong.  Maybe higher capital requirements are needed, but don’t do them as a substitute for effective stabilization policy, it will never work.

I don’t like policy fatalism for several reasons.  First, we should demand the best.  If we insist on it over and over again then eventually we will win.  I was taught that free trade is a pipe dream because the public and the special interests oppose it, and yet it’s becoming increasingly clear that the world is moving toward once giant free trade zone.  I was taught that high inflation was inevitable in a modern economy because the public would never put up with the high unemployment necessary to bring it down.  Then the economics profession reached a consensus on flexible inflation targeting, and we solved the high inflation problem.  Now the profession is gradually moving in the direction of a NGDP targeting consensus, why in the world give up now?

And remember those who assured us the Japanese would never adopt a 2% inflation target, because their political system was dominated by old savers?  Anyone follow the recent election in Japan?

So is there a good pragmatism, as the title suggests?  I think so.  Here’s a discussion of the problems in getting high speed rail built in the US, as part of an article on the new superfast tube transport idea:

A good example is the push by the Obama administration to develop high-speed rail around the country. Five years after President Barack Obama was sworn in and promised to put high-speed train service on the fast track, most of the proposals are far from reality.

Why?

Government bureaucracy, concerns about costs and the fact some elected leaders are openly fighting to stop the development of high-speed rail.

I have no idea whether tube transport will work, but I’m convinced of the following facts:

1.  The US is relatively bad at building that sort of thing.  Plus it’s very risky.

2.  Other countries like France and Germany and Japan and China are much better at this sort of thing.  We should let them test the idea first.  If it works overseas then build it here.  Hell, if it works the American public will demand we build it here.

3.  They’ve been free-riding on our drug research, it’s time we free rode on their transport research.

That sort of pragmatism is sensible, recognizing what you are good at and what you are bad at.  But there’s no reason not to demand the Fed adopt the right monetary policy.  None at all.  We should never be defeatist on that issue.

PS.  I’m old enough to remember when stores had those really neat pneumonic pneumatic tubes.

PPS.  I predict that at some point in the next decade Ben Bernanke will say that NGDP targeting deserves serious consideration.

PPPS.  As long as Elizabeth Warren is advocating Paul Volcker for Fed chairman, liberal intellectuals as a group have failed to send a loud and clear message on the importance of monetary stimulus.

PPPPS  Are there areas where Krugman would argue that the failure of the government to do the right thing implies the need for a more market-oriented approach?  (I was inspired here by Bryan Caplan’s recent judo move on “nudging.”)


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24 Responses to “Good pragmatism, bad pragmatism”

  1. Gravatar of chris mahoney chris mahoney
    12. August 2013 at 15:38

    Fauxcahontas shows that the Left is as ignorant as the Right on M policy.

  2. Gravatar of reader223 reader223
    12. August 2013 at 15:57

    Here’s Krugman’s article on the farm bill the House passed in early July:

    http://www.nytimes.com/2013/07/15/opinion/krugman-hunger-games-usa.html

    Although the main point of the post is the removal of the food stamps from the bill, he seems to be implying he is for the removal of the agricultural subsidies the bill provides.

    Krugman: “Long ago, when subsidies helped many poor farmers, you could defend the whole package as a form of support for those in need. Over the years, however, the two pieces diverged. Farm subsidies became a fraud-ridden program that mainly benefits corporations and wealthy individuals. Meanwhile food stamps became a crucial part of the social safety net.

    So House Republicans voted to maintain farm subsidies — at a higher level than either the Senate or the White House proposed — while completely eliminating food stamps from the bill.

    To fully appreciate what just went down, listen to the rhetoric conservatives often use to justify eliminating safety-net programs. It goes something like this: “You’re personally free to help the poor. But the government has no right to take people’s money” — frequently, at this point, they add the words “at the point of a gun” — “and force them to give it to the poor.”

    It is, however, apparently perfectly O.K. to take people’s money at the point of a gun and force them to give it to agribusinesses and the wealthy.”

  3. Gravatar of Brett Brett
    12. August 2013 at 16:10

    The tube thing would be more expensive, but I wonder if it might actually allay some of the usual NIMBYism that comes to bear when high-speed rail transport comes up. Higher construction costs, but fewer noise complaints, and you could bury the whole thing under sod and make it look like a hillside.

    1. The US is relatively bad at building that sort of thing. Plus it’s very risky.

    2. Other countries like France and Germany and Japan and China are much better at this sort of thing. We should let them test the idea first. If it works overseas then build it here. Hell, if it works the American public will demand we build it here.

    We just seem to be bad in general at building transportation infrastructure projects compared to some other countries. Spain eats our lunch.

  4. Gravatar of Morgan Warstler Morgan Warstler
    12. August 2013 at 16:24

    eh hem,

    “At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. And I don’t just mean banking regulation; as the authors of the linked paper say, the logic of this argument calls for policies that discourage leverage in general, capital controls to limit foreign borrowing, and more.”

    Ladies and gentlemen, I give you:

    4.5% NGDPLT

    Scott, how many times have I told you to pick a date like 2000 or 2003 or whatever and model thru till 2008 using 4.5% NGDPLT?

    It has to be 20, 30 times.

    Look, I know you like to say the crisis was money being too tight.

    Sure ok.

    But before that, under 4.5% we’d have start raising rates in 2004-2005.

    ——-

    It OBVIOUSLY would really help the debate for you to get into this now:

    1. PK wants macroprudential policies. NGDPLT is a loving taskmaster, and that becomes brutal if the private markets try to keep the credit rolling.

    2. NGDPLT forces the “fiscalprudential” too AND you ought to finally explain to people why this is.

    3. PK has now gotten overextended in the argument, this is a chessboard that if you now play only to a draw, you simply don’t have the chops.

  5. Gravatar of Greg Ransom Greg Ransom
    12. August 2013 at 16:26

    Krugman is spouting pure Hayek — the time to address the business cycle is *before* it happens. Krugman unfortunately lacks any coherent account of market process which works out the causal flow of the business cycle.

  6. Gravatar of Neal Neal
    12. August 2013 at 16:29

    Elizabeth Warren on the next Fed Chair: http://www.businessinsider.com/warren-backing-yellen-for-fed-chair-2013-7

  7. Gravatar of benjamin cole benjamin cole
    12. August 2013 at 17:23

    Pneumatic tubes?

  8. Gravatar of ssumner ssumner
    12. August 2013 at 17:26

    Ben, See what happens when my spell check is broken? It hasn’t works for weeks. You are now seeing the real me, and it’s not a pretty picture.

  9. Gravatar of ssumner ssumner
    13. August 2013 at 04:40

    reader, I’m almost sure Krugman has never favored ag subsidies. I’ve never met a liberal economist who did. Or a conservative economist. Or a moderate economist.

    Morgan, Yes, NGDPLT at 4.5% would undercut lots of Krugman’s arguments.

    Brett, Good point.

  10. Gravatar of Russ Anderson Russ Anderson
    13. August 2013 at 05:54

    Scott wrote “The US is relatively bad at building that sort of thing. Plus it’s very risky.”

    Actually, the US can be quite good at building those sort of things: the Panama Canal[1], the Atomic Bomb, landing a man on the Moon, the internet. But how would you respond to someone saying the Fed should not engage in Monetary policy because “The US is relatively bad at building that sort of thing. Plus it’s very risky.”? That, in large part, is the basis of political conservative opposition to active monetary policy. They view it as being “pragmatic”.

    I agree “We should never be defeatist on that issue.” But you are never going to convince political conservatives to support active monetary policy until you can convince them that the government can be good – and always good – at that sort of thing.

    [1] An unintended consequence of the Panama Canal were advances in mosquito control, techniques that later made large part of the world inhabitable and saved countless lives.

  11. Gravatar of ssumner ssumner
    13. August 2013 at 06:41

    Russ, I oppose active monetary policy, I favor a NGDP rule.

    The internet is nothing like this plan. We used to be good at building things like the Panama Canal, but no longer. Now China is good at it.

    We used to be good at manned space exploration, but are not longer good at it.

  12. Gravatar of Cthorm Cthorm
    13. August 2013 at 07:09

    Pneumatic tubes are still used in lots of big buildings, you probably have one in your local Home Depot. They’re very useful in large warehouses or factories, where they can get the right part to the right place much faster than sending a worker.

    I expect a demonstration version of the Hyperloop to be built in the US. In all likelihood China would build the first commercial version, simply because of the speed at which they can complete infrastructure projects.

  13. Gravatar of Cthorm Cthorm
    13. August 2013 at 07:16

    Scott – you said “We used to be good at manned space exploration, but are not longer good at it.”

    Surely you can see the irony in saying that in the same post where you’re discussing a pet idea from the entrepreneur that runs SpaceX (aka Space Exploration technologies). They’ve already made enormous progress in bringing down the largest barriers to further space access, both manned and robotic: launch costs. Amazingly, reusable rockets are not far away.

  14. Gravatar of TallDave TallDave
    13. August 2013 at 14:41

    “We used to be good at manned space exploration, but are no longer good at it.”

    Maybe we’re just better at not wasting money on some things. It’s not clear why manned space exploration makes any economic sense.

  15. Gravatar of TallDave TallDave
    13. August 2013 at 14:46

    reader223,

    The Tea Party is now targeting House advocates of the 2012 Farm Bill, suggesting that the bill itself is fatally flawed, and in actuality a boondoggle for food stamps. American Commitment, a Super PAC founded by former Americans for Prosperity exec Phil Kerpen, has taken out some $75,000 in ads against House members in Oklahoma, Iowa, and Missouri. Speaker John Boehner (R-Ohio) has already come out against the $957B subsidy and food stamp legislation.

    http://www.breitbart.com/Big-Government/2012/07/24/Tea-party-targets-farm-bill

    Krugman’s conflating “conservative” with “Republican” in a dishonest way.

  16. Gravatar of Ray Lopez Ray Lopez
    13. August 2013 at 20:02

    You armchair engineers that think the hypertube will work are like the armchair economists who think they can fine-tune the economy with fiscal and monetary tricks. Re hypertube, you need much better materials than you have now to safely and cheaply transport people. And btw by drilling a tube though the top half of the earth, you can actually shuttle people for free (using earth’s gravity field), as any student of Physics 101 using the Halliday and Resnick book knows.

    What then ails the economy? Easy: Great Stagnation as popularized by T. Cowen. How to overcome the GS? Easy: incentivise inventors to invent, who would ordinarily not invent. It’s well known that every inventor worthy of the Nobel Prize got nothing close to the monetary reward they deserved. In fact, under US patent law and elsewhere you cannot patent “a law of nature” (as if mathematical models were ‘laws’ waiting to be ‘discovered’ rather than the artificial inventions that they are). Change the law so the bright people that go into Wall Street, or business, or buying low and selling high, or real estate, go into science instead, and you solve the GS, long term. It never ceases to amaze me that free marketeers believe that “people respond to incentives”, to quote Mankiw’s Econ textbook, in every field *except* the one that really matters, and that’s innovation. As Solow’s model predicts, innovation really matters, yet in the USA and most places in the world (Japan and Germany being somewhat exceptions) an inventor must automatically assign to their employer all the rights to any invention they invent. This, like a perpetual servitude or slavery contract, should be against public policy. And the US patent system should be fixed to reward inventors not just with stronger patents but with government rewards and bounties. Nuff said, but history will someday prove me right.

  17. Gravatar of Scott Sumner Scott Sumner
    14. August 2013 at 06:37

    Cthorm and TallDave, I agree about space exploration.

  18. Gravatar of Russ Anderson Russ Anderson
    14. August 2013 at 10:44

    Scott wrote: “Russ, I oppose active monetary policy, I favor a NGDP rule.”

    The NGDP rule just formalizes the active monetary policy.

    Targeting 5% NGDP growth defines the goal, but it still takes active monetary policy, such as buying bonds, adjusting IOR, open market operations to reach that goal.

  19. Gravatar of Floccina Floccina
    14. August 2013 at 13:17

    You got to get government out of the money supply business. IMHO the best thing would competitive bank created money backed only with bank assets (loans, buildings, organization value etc.).

  20. Gravatar of ssumner ssumner
    14. August 2013 at 17:15

    Russ, That’s not what people mean by “active monetary policy.”

  21. Gravatar of Geoff Geoff
    14. August 2013 at 20:47

    “I applaud Krugman for keeping an open mind and rethinking his assumptions. I was too optimistic about the willingness of the Fed to stabilize NGDP. But I’ve drawn different conclusions from my failure.”

    This is a humblebrag. “I failed to anticipate how much more stupid other people would be compared to me.”

  22. Gravatar of Geoff Geoff
    17. August 2013 at 04:43

    Free market Keynesian is a contradiction in terms.

    Krugman writes:

    “At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes.”

    Thanks to people like Krugman we haven’t had an effective cleanup. We’ve got more state intervention, not less.

    You see? This dovetails right to my argument in another thread about destructive individuals believing their destruction to be inherent in the market, and considering themselves intellectually capable of fixing it.

    Krugman wants more regulations and more taxes. And you are applauding him? Like I said, socialists.

  23. Gravatar of Joe Eagar Joe Eagar
    25. August 2013 at 02:51

    By the way, Costco still uses pneumatic tubes, for transporting checks and the like from the cashiers to the office.

  24. Gravatar of Joe Eagar Joe Eagar
    25. August 2013 at 03:04

    This is interest. I’ve been wondering myself if a counter-cyclical macro-prudential policy (consisting of capital surcharges and cross-border capital controls) wouldn’t solve a lot of problems in our economy. I’m not totally convinced, though; my understanding is that such policies only work if they create a feedback loop, where tighter financing conditions lead to a higher level of private savings.

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