I have some recent posts bashing Krugman and his pal DeLong. So maybe it’s time to show that I can be just as “fair and balanced” as Fox News, er, I mean NPR and the BBC. This won’t be entirely positive, but I think Krugman fans will be very pleased by the ending. (Bob Murphy may want to skip this one.) Let’s start with three recent posts by Krugman that show him fighting the good fight against the forces of reaction:
Here Krugman discusses changes in the price of the median good within the CPI. Back in the days before I decided that inflation was merely a human construct with no relationship to “reality,” and of no real use for anything, I also thought that the median CPI price might be one way to get at the underlying forces of inflation and deflation. And the most recent data shows that while the headline CPI has been rising since early in the year, the more meaningful median CPI has been falling, down to about 0.5% in September. I see the median as best representing purely monetary forces, as it shows the point where one half of all goods rose at a slower pace, and one half rose at a faster pace. I agree with Krugman that this is a better indication of the future course of the CPI than the headline rate. And the two-year CPI futures and TIPS markets also seem to agree.
This post suffers from some of the same flaws as the China editorial I just criticized, but does make one good point. If the Chinese were to dump US assets and buy some other assets (say European government bonds) it would tend to depreciate the dollar and could actually boost the US recovery.
And finally in this post he bashes all those right wingers who keep clamoring for tighter monetary policy in the US.
The thing that is so frustrating about Krugman is that he can be so correct in his analytical approach to money, and yet fail to emphasize the logical implications of his analysis; money has been far too tight in the US over the past 14 months. But first let’s look at three big positives:
1. Krugman correctly argued that tighter money would be a bad idea in mid-2008 and again today, and has been bashing those at the Fed who keep itching to tighten policy. That’s one feather in his cap.
2. Krugman understands that even at the zero bound a central bank still has options. They can set an inflation target high enough to lower long term real interest rates. Here I’ll only give him 1/2 feather, because he’s been remarkably shy about publicizing this point. But at least when he has done so, he ‘s indicated that the Fed should have a higher inflation target.
3. Many economists, including Krugman, did research showing various ways out of the liqudity trap; but he has been the most vocal in arguing that it isn’t as easy as it seems, and that we could easily make the same mistakes as Japan. I thought Bernanke would have done better, and should have done better. But the fact remains that Krugman was right and I was wrong, policymakers have reacted pretty much as he forecast. So there’s another feather.
Krugman’s argument for fiscal stimulus still strikes me as wrongheaded. He is essentially saying the following:
1. Unconventional monetary policies might work at the zero bound.
2. Conventional monetary stimulus cannot work at the zero bound.
3. Central banks are too conservative to promote unconventional stimulus though inflation targets.
4. Ergo, monetary policy is ineffective at the zero bound.
My number 4 would be “Ergo, we should all start screaming at the major central banks to be less conservative.” Indeed, the only effective monetary policies at any time, zero bound or not, are those that change the expected future path of policy. So in a sense Krugman’s argument is nothing but the banal observation that when monetary policymakers refuse to do effective policies, policy will be ineffective.
But let’s end on a positive note. Suppose the FOMC in 2008 had been composed of 12 Paul Krugman’s. If we can take him at his word, and I don’t see why not, he would have been much more aggressive in easing during the crucial months in mid-2008. And then when it became apparent that there was a threat of deflation, I could easily see Krugman setting a fairly expansionary inflation target. He has frequently discussed the need for high inflation expectations in a liquidity trap. Here I think it might be helpful to briefly go back to the Great Depression, and see what FDR did.
In 1933 FDR shocked the world by devaluing the dollar when the dollar was under no pressure at all. Sure, other countries had already devalued, but they generally did so when their currencies had been under speculative attack. We had the world’s largest stock of gold in 1933, and by the time of the late April devaluation the brief run on the dollar at the end of the Hoover administration seemed like ancient history. Even worse from the perspective of respectable opinion, he kept devaluing long after others (including even Keynes) said he should stop. Now we have Krugman calling for even further dollar depreciation at the very moment everyone is panicking about a weak dollar.
At the World Monetary Conference of June 1933 FDR essentially gave the middle finger to right-wing monetary and financial experts all over the world, and said something to the effect that: “Monetary stability isn’t stable exchange rates, it’s price stability. But first we need to return prices to pre-depression levels, and then stabilize them.” And he relished doing this. Do people like Bernanke and Svensson have the personality to do something equally controversial? I think you know the answer. But given how Krugman feels about the right-wing forces calling for tight money despite market expectations of ultra-low inflation and near double-digit unemployment, and given Krugman’s, how shall I put it, somewhat combative personality, I could see him in the FDR role. And then we never would have even needed the $800 billion dollar stimulus package. I bet you never thought I’d have a post with a title like this one, where I wasn’t being sarcastic. If you know a Krugman fan, please pass it along. As Rodney King said: “Why can’t we all just get along?”