An odd coincidence
About the time I was writing this sentence for a post this morning:
My hunch initial hunch was that the average non-economist simply assumes that governments can always generating inflation if they so wish, but boosting AD in a severely depressed economy full of pessimistic people is really hard to do. They don’t see those two outcomes as being two sides of the same coin.
Paul Krugman was posting this (in response to a WSJ article):
Sorry, but that’s totally wrong. The question is whether, at the zero bound, the Fed has the ability to increase aggregate demand “” full stop. If it can increase aggregate demand, it can fight both deflation and unemployment; if not, not.
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14. July 2010 at 16:12
Yeah, but Krugman is insisting in his advocacy, whatever he actually believes, that the Fed at this point can’t create aggregate demand. You and Paul, apart again.
14. July 2010 at 16:32
@TA,
Not so. What Krugman says is that printing money will only work if the public believes the increase is permanent. If they think the Fed is going to take it all back later, it has no effect. Scott agrees with this.
What’s weird about this is that Krugman refuses to endorse something that would make the Fed credible, and that’s a publically announced target for expected nominal GDP. If the Fed or Treasury encouraged the creation and trading of NGDP futures, we’d have a market-based measure of expected NGDP, and people could easily see for themselves whether or not the Fed was acting consistently with its announced target. If so, it is credible, and you get all the monetary goodness that implies.
14. July 2010 at 16:46
You need to proof-read your paragraph again…
14. July 2010 at 16:57
And Jeff:
DeLong comments on that, and says that there is actually something the Fed can do – raise inflationary expectations. So DeLong is not just going with Krugman on this one.
http://delong.typepad.com/sdj/2010/07/helicopter-drop-time-paul-krugman-gets-one-wrong.html
14. July 2010 at 17:03
AND again…
If the Fed unwinds and liquidates its huge plated of MBS in a glorious auction for individuals who can bring 30% down, there will be less pessimism:
1. The guys with dry powder have been WAITING PATIENTLY – and they are pessimistic that the Fed has been screwing up their rightful bounty.
2. Small business guys are pessimistic that banks are getting bailed out…. they want to see them lose fairly in the market. It will raise their animal spirits.
3. The renters will be very happy when their rents go down, they will have more money to spend elsewhere.
14. July 2010 at 17:04
@ Jeff
I think he *sort of* believes the Fed can increase AD, but if you read the rest of that article he thinks Bernanke (circa 2002) has overstated how easy it is.
14. July 2010 at 17:15
I stole this from a DeLong commenter: The war cry of pro money stimulus people should be: “Get to da choppa!”
14. July 2010 at 17:17
Separated at birth?
14. July 2010 at 17:45
I seems to also be arguing that the fed can’t generate inflation if it wants to, in addition to it not being able to pump AD?
Is Krugman turning into a post-keynesian?
14. July 2010 at 18:34
Krugman´s conclusion 12 years ago:
“… the traditional view that MP is ineffective in a liquidity trap and that fiscal expansion is the only way out has, therefore, to be qualified: MP will be effective, after all, if the CB can credibly promise that it will target a higher future price level”.
And that´s a prelude to “Sumnerianism”, where to credibly promise to target a higher future price level target is turned into targeting NGDP path.
15. July 2010 at 04:27
TA and Jeff, Jeff is technically correct, but TA is also correct in a way. It is a question of emphasis. I believe that we should never suggest that it is hard for the Fed to inflate, because it isn’t hard. Krugman seems to think it is hard. Yes, I wish he’d focus on NGDP. That’s what Yglesias focuses on now.
Dilip, Yikes. I am blogging so much I am getting really sloppy. Thanks, I corrected it.
JimP, Yes, I saw that. And right after I accused him of always parroting Krugman. Good for him.
Morgan, Yes, I recall that is your view.
John Salvatier, Yes, that’s about right.
David, We don’t look at all alike.
Doc Merlin. I think the PK-types also have odd views when rates aren’t at zero. Krugman is more conventional in those cases.
Marcus, Yes, I have similar views to his 1998 papers.
15. July 2010 at 08:51
Sumner and Krugman, two sides of the same coi– *avoids slap*
16. July 2010 at 07:40
Edwin, More like Dr. Jekyll and Mr. Hyde.