Make it eight posts today. I couldn’t resist giving kudos to Krugman for this outstanding post. I take pride in the fact that I have been making some of these points all year. But he has some sharp observations that I did not make:
As far as I can tell, what’s going on in monetary policy debate is a policy in search of a justification. Many central bankers just hate, absolutely hate, being in the position of being so accommodating; yet economic analysis offers no justification for tightening. So they’re inventing new policy doctrines on the fly to justify doing what they want to do.
Krugman’s like a good attorney. You may not like him. You may not agree with him. But you want him on your side during a debate. Right now he’s on my side—telling the Fed to get more expansionary. (Recall that hawkish Fed talk is equivalent to a contractionary policy, in both his model and mine.)
PS. Krugman and I both like to bring up 1937-38. The revised 3rd quarter NGDP numbers are out—making it almost certain that 2009 will see the biggest drop in NGDP since 1938. The 4.3% NGDP increase was revised down to 3.3%. The normal rate is 5%. How’s that fiscal stimulus doing? But give the US economy credit. Even with Fed hawks doing all they can to inhibit AD, and even with the government restraining SRAS with 40% minimum wage increases and a tripling of the duration of unemployment benefits, the economy eked out 2.8% growth, as the SRAS curve shifted a bit to the right with sharp wage cuts. But there has to be a better way to run a modern economy. This is pathetic.