An American whine

Paul Krugman recently did a post mocking those Europeans who complain about the Fed actually trying to do its job.  He quoted a European policymaker whining that monetary stimulus in the US would depreciate the dollar and thus hurt Europe.  Here’s Krugman’s response:

In other words, how dare you act to protect your economy from deflation and double-digit unemployment? By doing so, you make our inappropriate tight-money policy even more destructive!

I love it.  But at the same time it’s important to recall Bryan Caplan’s admonition that we Americans are much too quick to perceive harm inflicted by others, and reluctant to recognize when we are the villains.  So I tried to re-work the quotation, so that we could see how our complaints might appear to someone living in China:

In other words, how dare you Chinese act to protect your economy from deflation and double-digit unemployment by refusing to revalue the yuan? By doing so, you make our inappropriate tight-money policy even more destructive!

I look forward to future Krugman posts that point out how America’s China-bashers overlook the fact that the Federal Reserve System has the power to do much more, but simply refuses to use that power.  And how do I know this?  By reading a Paul Krugman post written just one day earlier.


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38 Responses to “An American whine”

  1. Gravatar of Morgan Warstler Morgan Warstler
    16. October 2010 at 16:24

    Krugman is scum.

    “The Chinese yuan should not be a scapegoat for the United States’ domestic economic problems,” Commerce Ministry spokesman Yao Jian said on Friday.

    http://www.reuters.com/article/idUSTRE69E0OB20101016?

    And you Scott, appear to be a coward… when you have the stones to go after real opposition it’ll actually be more meaningful to the powers that be.

    http://globaleconomicanalysis.blogspot.com/2010/10/inflation-targeting-proposal-exercise.html

    If I can get Mish into a Video Discussion with you, will you do it?

  2. Gravatar of JKH JKH
    16. October 2010 at 16:53

    The Fed has the power to do much more, but not the power on its own to change the Chinese peg. What’s the inconsistency?

  3. Gravatar of Bob Murphy Bob Murphy
    16. October 2010 at 17:15

    Scott, check it out.

  4. Gravatar of Bob Murphy Bob Murphy
    16. October 2010 at 17:16

    (BTW I left that comment at Krugman’s blog before reading your post, Scott.)

  5. Gravatar of scott sumner scott sumner
    16. October 2010 at 17:48

    JKH, The inconsistency is that he’s saying if the Fed does much more, then the Chinese yuan being undervalued is not a problem. And he’s saying if the Europeans would do much more, then it wouldn’t matter how low the dollar got. So how can he mock the Europeans for complaining about US monetary policy? The inconsistency is glaring. It has nothing to do with the rate being pegged, Krugman would be just as upset with the Chinese if the rate was floating, but intervention pushed it to a low level. In fact the rate is floating now.

    And don’t say the Europeans could match any depreciation in the dollar; what if we produced hyperinflation? The European central bank could hardly be expected to produce hyperinflation, and I’m sure Krugman wouldn’t ask it to. Krugman’s saying that if you can use domestic monetary policy to generate adequate levels of AD, then a weak yuan is not a problem for the US. That’s clearly his view.

    Bob, Sorry for the plagiarism—great minds think alike.

  6. Gravatar of scott sumner scott sumner
    16. October 2010 at 17:51

    Morgan, I’d love to debate Mishkin, but I’m afraid I’ve never heard of Mish. Who is he, and what are his views about monetary stimulus?

    Generally speaking I don’t think it’s a good idea for commenters to try to set up debates. But I can’t stop you.

  7. Gravatar of Doc Merlin Doc Merlin
    16. October 2010 at 18:21

    If anything, other countries devaluating their currency should help you more than you devaluating your own. You get products cheaper, and they trash their savings, but you keep your own intact.

    Anyway, wrt the Yuan:
    China the Yuan was about 0.12 USD in early 2005 and it steadily rose to 0.15 USD to now, yet it hasn’t seemed to affect their growth whatsoever. I don’t understand how everyone is claiming that the YUAN is undervalued, when
    1. Over the long run money is neutral
    2. it is has been rising (not falling!) in value versus the USD.

  8. Gravatar of Dustin Dustin
    16. October 2010 at 18:54

    Mish is a nobody, Scott.

    I don’t think he has any formal academic background in economics, but I could be wrong. I think he does something with photography.

    Oh, and he works in finance or something. Writes a financial blog. And has the world divided into three parts:

    Bad Part I: Keynesian clowns
    Bad Part II: Monetarist clowns
    The Only Good Part: Rothbardian Austrians

    He would dismiss you as nothing but a “monetarist clown”.

  9. Gravatar of david david
    16. October 2010 at 19:10

    Mishkin – Michael Shedlock – is a non-academic self-described adept of the Austrian school. As such he rejects monetarism and New Keynesian approaches, including the notion that inflation expectations matter at non-hyperinflationary levels.

    He is an investment banker, not an academic, so I suspect that any debate between you and him will end badly for both. Here is a sample of Shedlock at his most theoretical. Note that, despite self-identifying as Austrian, he seems to be appropriating a post-Keynesian model of money and credit, endogenous money and all (I wonder whether Warstler realizes this!).

    I daresay a debate with Mishkin would be interesting, if only to watch a dedicated monetarist fight a dedicated endogenous-money advocate. But I daresay Mishkin would not do Austrian theory or post-Keynesian theory justice.

  10. Gravatar of Morgan Warstler Morgan Warstler
    16. October 2010 at 19:13

    Excuse me… but there NO chance of Fiscal Stimulus, so arguing with Krugman is a waste of time… BUT, the Mish (Mike Shedlock) crowd – the Austrians actually have some sway on the Fed.

    And that’s my point, Scott shies away from any serious aggressive confrontation with modern Austrian arguments.

    Scott spends his time reading Think Progress and Krugman, and after the election… they are no longer part of the discussion.

    Real Fed Hawks work largely from a completely different set of assumptions, and Scott should be looking at the facts and figures and arguments being made by TODAY by his real opposition.

    Day to day, Mish’s site pulls stats and figures and draws completely different analysis than what Scott surrounds himself with.

  11. Gravatar of Steve Steve
    16. October 2010 at 19:15

    Scott,

    It’s “Mish” as in Mike “Mish” Shedlock, not Mishkin.

    Morgan,

    That piece you linked to is one of the worst macro pieces I’ve ever read. It’s both arrogant and wrong– a detestable combination.

    If you believe that the Fed’s decision to go ahead to with QE2 will affect relative price levels (raise commodity prices) but not affect nominal aggregates (raise real GDP or inflation) then you must believe that the Fed is exclusively a microeconomic agent. That’s a patently bizarre assertion that immediately calls into question the basic competence of the author! If “Mish” is right, shouldn’t the Fed jack up interest rates so that we can live in a world of infinite cheap oil?

  12. Gravatar of david david
    16. October 2010 at 19:17

    *Mish, not Mishkin.

    Incidentally, there was a well-publicised fight recently between Shedlock and Peter Schiff – who are, curiously, both finance commentators who claim to be invoking Austrian economics. The roots of the disagreement seem to lie in Shedlock’s reliance on post-Keynesian models of money, as far as I can tell, although neither side seems to be realize this.

  13. Gravatar of JKH JKH
    16. October 2010 at 19:21

    Scott,

    Where has Krugman said “if the Fed does much more, then the Chinese yuan being undervalued is not a problem” ?

    Has he actually said that, or do you infer it?

  14. Gravatar of david david
    16. October 2010 at 19:23

    Wait, the Austrians have more influence on the Fed than monetarists? Someone tell Boettke!

  15. Gravatar of david david
    16. October 2010 at 19:44

    @Warstler

    You may also wish to consult #1, #2, #3 for our kind host engaging with Austrian theory; see the comments in particular.

  16. Gravatar of Bob Murphy Bob Murphy
    16. October 2010 at 20:38

    Also, Mish has criticized Gary North and (I think) me, by name. Mish thinks the conventional story of open market operations, the money multiplier, etc. are dumb, and that we are in the midst of deflation right now. But gold prices are going up because gold is money.

    (Scott, I think you know this, but of course I wasn’t accusing you of plagiarism.)

  17. Gravatar of Bonnie Bonnie
    16. October 2010 at 22:07

    It seems like these days no matter what happens, if the Fed keeps doing the ‘wrong’ thing, there are howls about the deflation effects. If it tries to correct the problem by finally doing the ‘right’ thing, there are even more howls. Austrians howl no matter what because they don’t like the Fed, period. On that point I tend to agree, although maybe not for the same reasons. But it’s what we have for the here and now, and I think the reality of our national financial situation has to show up in the value of the dollar at some point whether it be from the external markets or something the Fed needs to do get us moving again from the various blows the economy has taken over the last couple of years. Simply put, as we are experiencing, defending the dollar in the face of such financial calamity and huge public debt certainly has its downside that I don’t think many can reasonably defend.

    All the howling over QE2 is the same old stuff of people wanting the government to do certain things, or voting for and continually reelecting big spenders, state capitalists, and/or flaming socialists and then not wanting to pay for what they do – kick the can down the road, pass the bill off to the kids, rip off the Chinese, do anything but bring out the tax man or the printing press. It’s like suddenly someone else voted for those guys, but they didn’t. Maybe they didn’t vote for those guys because they stayed home on the couch eating Cheetos on many an election night instead of getting off their duff and voting. However it happened, somebody did vote for them and we get the government we collectively deserve. Howling about QE2 won’t change the reality that the bill for past government largess has to be paid, one way or another.

    There is no such thing as a free lunch, free houses, free health care, free national defense, free public corruption, retirement bonuses that far exceed the value of what’s paid in individually, etc.., and we can’t have the appetite for a smorgasbord to the tune of $14T public debt today and $65T unfunded libailies for the next decade and expect to skip out on the bill in whatever form it arrives.

  18. Gravatar of JTapp JTapp
    17. October 2010 at 03:48

    This tidbit in the WSJ today:
    “Inflation expectations were behind an idea recently raised by Chicago Fed President Charles Evans and New York Fed President William Dudley in which the central bank would plan to overshoot its inflation target for a time to make up for periods when it falls below that target. Forty-two of the economists said that would be a bad idea, while just 13 thought it could be effective.”

    So, private forecasters oppose the idea of price level path targeting.

  19. Gravatar of marcus nunes marcus nunes
    17. October 2010 at 04:50

    Scott
    This post is long. You can “feel” the author crying as he writes. There are many (I think) conceptual mistakes about the process that went on for the last 25 years. Maybe you´ll care to do a “countervailing” post?
    http://fistfulofeuros.net/afoe/an-unusual-but-interesting-argument-which-may-help-to-understand-why-qe2-is-now-almost-inevitable/

  20. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2010 at 05:29

    Excuse me but Bob but:

    1. Fractional reserve might not be “dumb” but the leverage needs to reduced, so that money supply goes down, and the cost of money goes up. There are ways of reducing cost of borrowing – by making banks more productive. The age of Bricks and Mortar banks is over. Either way… overall, LESS BORROWING, is the smart policy.

    2. The guys who trade are smarter than the economists the moment the economists assert they are smarter than the traders.

    3. You moaners need to stick to what I wrote. No the Austrians are not winning, but the “pain caucus” are a FAR MORE influential group to take on – than anyone urging Fiscal. Scott has Krugman fetish… because he’s the weakest milquetoast at the ball. There’s ZERO chance of DeKrugman mattering.

  21. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2010 at 05:32

    http://www.bloomberg.com/news/2010-10-15/fed-wants-to-hoodwink-public-fools-itself-commentary-by-caroline-baum.html

  22. Gravatar of Rebecca Burlingame Rebecca Burlingame
    17. October 2010 at 06:20

    Scott,
    They linked to the fistfulofeuros post at Marginal Revolution, and I believe the first commenter noted the fact that the economist was European, which would probably have some bearing on the argument.

  23. Gravatar of scott sumner scott sumner
    17. October 2010 at 07:02

    Doc Merlin, Yes, Everyone called for a 27% appreciation back in 2005. They’ve got over 20%, and the Chinese surplus got may times bigger. And now they are calling for 20% to 40% more! The protectionists are insatiable.

    Dustin, A Rothbardian? Remind me to skip that blog.

    David, A mixture of Austrian and Post Keynesian? I can’t imagine how Morgan can read both of our blogs w/o getting mental whiplash.

    JKH, Back when he started talking about China he said in normal times a undervalued exchange rate in China would not be a problem, as we could cut rates. But because we are at the zero bound, the Keynesian model of mercantilism applies.

    I do understand the logic of his argument. If the Fed really could do no more, it would be a defensible argument (although I still have doubts for other reasons.) But it is silly for him to argue that we must punish the Chinese for an undervalued yuan, because the Fed can do no more, and then turn around and argue the Europeans have no complaint about an undervalued dollar, because the ECB can offset that with more monetary stimulus. I can’t believe people aren’t seeing how inconsistent he is on this issue.

    This earlier post by me discusses one of Krugman’s posts that talks about this issue, but there are many others from back in 2009–where he specifically links the argument for action against China to the US being in a liquidity trap. And isn’t it obvious why he does?

    http://www.themoneyillusion.com/?p=4441

    Bob, Gold is money? Wow, I never knew that. Yes, I know you weren’t accusing me. BTW, another commenter made the same point in a earlier comment section of mine, before I posted it. The internet is basically 90% plagiarism anyway–we’re all saying many things that are quite similar to what others are saying.

    Bonnie, Yes, there aren’t many free lunches.

    JTapp, I’m not surprised, most economists have opposed more monetary stimulus for quite sometime. I find it bizarre, and have no explanation but that’s what polls show. Keep in mind most economists vote Democratic. I would have thought the Republicans would be opposed.

    Marcus, Yes, I think he gets many things wrong. It is dangerous to look at things from a exchange rate perspective. For instance, he says not all countries can depreciate at once, and yet they can in the only sense that really matters–against goods and services. He is trying to explain global NGDP in a model that holds global NGDP constant.

    Morgan, Baum talks about inflation without talking about AD. That’s a big mistake. There is no context to her discussion. What should the Fed be trying to do to AD?

    Rebecca, Thanks, I’ll take a look.

  24. Gravatar of Doc Merlin Doc Merlin
    17. October 2010 at 07:35

    “Doc Merlin, Yes, Everyone called for a 27% appreciation back in 2005. They’ve got over 20%, and the Chinese surplus got may times bigger. And now they are calling for 20% to 40% more! The protectionists are insatiable.”

    Agreed, and I believe that the monetary revaluations are completely pointless in a well functioning economy (they should have an effect where the economy is being distorted by government activities though). They think that the Chinese reevaluating their currency will fix the imbalance but in my oppinion the imbalance with China is almost completely supply side. It is driven almost entirely by legal policy that introduces real costs (such as environmental policy, OSHA regs, etc).

  25. Gravatar of Silas Barta Silas Barta
    17. October 2010 at 08:39

    I thought Bob_Murphy was posting that (about how the Chinese could point to Krugman’s article in reference to their currency policies) as a reductio ad absurdum.

    It’s kind of funny how every time you try to reductio scott_sumner’s arguments, he turns right around and says, “yep, I agree”. Sigh…

  26. Gravatar of Mattias Mattias
    17. October 2010 at 09:56

    I’m just amazed how many people (and not only in USA) follow the many “Austrian” amateur economists like Mish, Schiff, Prechter, Rogers, Faber, Griffiths, Hendry etc. It’s probably the fact that they are considered financial wizards and most of them have made a fortune in the financial business. I think their records are pretty mixed the last couple of years. What they have in common is that they warned of a big crash before 2008. I’m not sure if that was skills or just pure luck. Most of the Austrians have been very negative for a looong time and when the great recession hit they felt vindicated.

    Their lure is even stranger when you consider how much more ‘available’ the interesting economics debates have become since many of you started blogging. I think it’s a great service you provide having the debate out in the open. In the long run I think people will get tired of these particular Austrians when more and more people realize that their thinking is basically flawed. As long as gold is rising I think we will have to wait however.

    (I’m sorry for typos and bad writing but commenting on the phone is not that easy)

  27. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2010 at 10:25

    Oh yes, let’s reduce the hawks argument to GOOOOOOLLLLDDDD!

    Scott, you ARE NOT GOING TO GET level inflation targeting past 2%. This is your own statement.

    So, PLEASE can you focus on either of two topics soon:

    1. When 2.5% inflation happens, and according to the policy it is time to pull money out… is your whole argument going to be “we need a higher target” – Can you please skip ahead to unemployment is high and inflation is higher – when do you FINALLY say “We’re going to have to EAT the 8% unemployment.”

    I’m asking because you have a habit of saying “I’ll take whatever I can get” – but a POLICY you support means that when it is in place – you don’t become a critic of the it when the topside rule gets triggered.

    2. I think Cochrane’s idea of a futures market is different than yours – I’ve watched the video twice.

    I’d like to see a clear why you think yours is better or worse.

    Those are my requests for deeper discussion.

  28. Gravatar of W. Peden W. Peden
    17. October 2010 at 10:36

    Mattias,

    The Amateur Austrians (who wouldn’t recognise the Regression Theorem or the Average Period of Production if they were written on a giant blackboard) have an appeal to the Right for the same reason that JKG had an appeal to the Left: we all want to believe that economics is a kind of medieval morality play, where prudence is rewarded and vice is punished.

    The real world, of course, is not like that. The diligent savers of Germany suffered the most in the early 1920s, while the profligate saw their loans wiped out in real terms. Britain went off the Gold Standard in 1931 and saw employment settle by 1937; the US stayed on it and experienced stagnation and a double-dip.

    There is a real appeal in the idea that economic problems are caused by moral failure, whether it’s social inequality or excessive spending or whatever. That’s a far more appealing world, if you ask me, than a world where we are semi-blind rafters on a rough river, hurtling towards an unknown destination and unable to tell with certitude what using our oars will do. The only problem is that we live in the latter world, not the former.

    If people were ever going to give up on the Austrian School, they would have done so long before now. For a school of economics that detests empiricism and endorses the most extreme apriorism of all economists, they have a stock of examples of prophecy (von Mises predicted the Great Depression when he said that a bank would fail back in 1923, Ron Paul predicted the current crisis, Schiff predicted the current crisis etc.) which they use to groom converts.

    At the same time, they are good at wiggling out when they call something totally wrong. Austrians are addicted to predicting hyperinflation and needless to say that, if their predictions were correct, we would currently be mired in hyperinflation. The one time I confronted one and pinned him down on this point, he appealed to the aprioristic nature of economics and questioned the accuracy of US CPI figures!

    That is coupled with endless predictions of the dollar collapsing, because they can’t comprehend why people put so much value into fiat currency. If they actually realised the implications of von Mises’s Regression Theorem and applied it to all phenomena, they would realise that gold is no more intrinsically valuable than a Continental. Gold is just an easier way of exchanging cows, anyway.

  29. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2010 at 11:07

    “The diligent savers of Germany suffered the most in the early 1920s, while the profligate saw their loans wiped out in real terms.”

    This is an argument against Scott, you realize?

    We aren’t facing hyper-inflation… (straw man) you keep skipping the point: we have a GIANT opportunity to use this period to GUT the public sector.

    The reason Cochrane’s futures market is so nice.. is because it straight jackets the Fiscal side.

    —–

    That’s the POINT – mostly all the “new monetarists” are just folks who have no respect winners and savers – meaning they are leftists.

    Scott claims to be a right-wing liberal, but the truth of it is he hasn’t yet gone on record for WHEN the Fed finally shrugs and says, “the wrong people have the hard assets, and they need to be gutted.”

    Please stick to the point the other side is making.

  30. Gravatar of Andy Harless Andy Harless
    17. October 2010 at 17:13

    I don’t think Krugman is being inconsistent. For one thing, the risks and potential costs associated with the monetary policy necessary to produce a US recovery in the face of an undervalued yuan are much higher than those that would exist in the face of a floating yuan. (Even if you don’t believe this, it’s a defensible position.) The same is not true on anything like the same scale in the case of the euro vs. the dollar. The Fed is already going out on a bit of a limb (although I agree it should go much further out), but the ECB is not even on a limb. The ECB is not even on ZIRP. The Europeans have no cause to complain that we are forcing them to take extreme actions when they haven’t begun to take those actions. The US is on the verge of extreme actions, and we can reasonably complain that China is forcing us to take even more extreme actions (which the Fed may be unwilling to take).

    Moreover, the Chinese policy is manifestly not necessary to protect its economy “from deflation and double-digit unemployment.” China has more inflation than it wants. It is struggling with all kinds of ridiculous second-best policies to control inflation instead of using the obvious one.

    Also, the Europeans are complaining about market-based policies in the US. The US is complaining about a policy that is facilitated by capital controls in China. I’m not saying capital controls are always a bad thing, but when you start following non-market policies like that, there is arguably a sort of moral obligation to use them in a way that is internationally responsible. At least it seems reasonable to me for other countries to complain if you don’t.

  31. Gravatar of scott sumner scott sumner
    17. October 2010 at 18:31

    Doc Merlin, I don’t agree, I think it is mostly a saving/investment imbalance, and has nothing to do with OSHA, EPA etc.

    Silas, I’m afraid you lost me. What was Bob trying to do?

    Mattias, I have zero interest in people who get lucky in economic forecasts–but I guess others are more superstitious.

    Morgan, I’ve published many papers on futures targeting. When Cochrane comes up with a specific published plan, I’ll take a look.

    Andy, You said;

    “I don’t think Krugman is being inconsistent. For one thing, the risks and potential costs associated with the monetary policy necessary to produce a US recovery in the face of an undervalued yuan are much higher than those that would exist in the face of a floating yuan. (Even if you don’t believe this, it’s a defensible position.) The same is not true on anything like the same scale in the case of the euro vs. the dollar. The Fed is already going out on a bit of a limb (although I agree it should go much further out), but the ECB is not even on a limb. The ECB is not even on ZIRP.”

    You unintentionally just demolished Krugman’s argument. Krugman also argued the Chinese were hurting Europe in an earlier post. When I pointed out that Europe is not stuck as the zero bound, he argued they were. So he’s already on record on that point, which makes the double standard just that much more glaring.

    And let’s be serious, US NGDP fell by well over a trillion dollars relative to trend, yet there was no significant change in the Chinese/US trade balance. That’s a completely trivial factor compared to the scale of our AD problem. China’s trade surplus is only about 20% bigger than Russia’s.

    You said;

    “Moreover, the Chinese policy is manifestly not necessary to protect its economy “from deflation and double-digit unemployment.””

    They are already appreciating their currency, a policy I support. But Krugman demands a massive currency appreciation. Michael Pettis, who knows far more about China than either Krugman or I, and who generally shares Krugman’s Keynesian approach, also favors a gradual increase (in a recent post). He says a sharp appreciation would hurt the export industries quite badly. And this is from a guy who views the undervalued yuan as a problem. Krugman is playing around with an issue he doesn’t fully understand. He doesn’t seem to have any awareness of the human cost of the potential lost Chinese jobs in export industries. They don’t have the sorts of safety nets we have–these people are desperately poor by American standards.

    You said;

    “Also, the Europeans are complaining about market-based policies in the US. The US is complaining about a policy that is facilitated by capital controls in China. I’m not saying capital controls are always a bad thing, but when you start following non-market policies like that, there is arguably a sort of moral obligation to use them in a way that is internationally responsible. At least it seems reasonable to me for other countries to complain if you don’t.”

    I do think capital controls are always a bad thing, but I also think they are none of our business. China could achieve exactly the same surplus w/o the controls. All they need to do is implement high saving fiscal policies. And the Europeans would deny Fed QE is a free market policy–they’d say our government is artificially depressing the value of the dollar. In an earlier post I argued all these “natural” and “artificial” distinctions were meaningless, as the government’s always involved. By the way, Krugman does favor capital controls, and I notice he doesn’t base his anti-China argument on that point. Instead he claims forex accumulation is prima facie evidence China is cheating. But don’t most countries accumulate forex? Are China’s reserves bigger on a per capita basis than other Asian countries? The answer is no.

  32. Gravatar of Doc Merlin Doc Merlin
    17. October 2010 at 19:10

    “Doc Merlin, I don’t agree, I think it is mostly a saving/investment imbalance, and has nothing to do with OSHA, EPA etc.”

    One of the main reasons companies move operations overseas is to avoid environmental laws. The guardian just published an article about this wrt the EU and carbon dioxide recently as well.

  33. Gravatar of JKH JKH
    18. October 2010 at 03:37

    Scott,

    I’ve reviewed the Krugman posts you linked to, and still see his position as consistent.

    First, regarding his interpretation of Europe, he was examining the issue of a liquidity trap at the global level, and classifying a group of countries according to the lowest common denominator, including contingent behaviour in addition to current condition. He was obviously aware that Europe was not yet at the zero bound, and still had some room to ease conventionally in that sense. That wasn’t the criterion under which he was including Europe in a global liquidity trap class. Furthermore, he qualified his use of the term liquidity trap in the case of the EZ as recognizing an unusual institutional barrier to unconventional easing at the zero bound, at such point as the zero bound actually became binding: “because the ECB probably couldn’t engage in Fed-style quantitative easing even if it wanted to, given the lack of a single backing government”. His inclusion of the EZ in the liquidity trap category was not based on zero bound contiguity at the time, but on the expectation that the zero bound if and when it was reached would be more constraining for Europe than it would be for the US. However, the facts have now changed regarding that institutional barrier, since unconventional easing is now a component of the broader EZ rescue package. And in the context of the more precise bilateral comparison between the US and Europe, the EZ isn’t even at the zero bound yet, and Krugman obviously knew that then and knows it now. In short, the global context for comparison he used then was a broader brush stroke than the bilateral comparisons of marginal easing capability he refers to in his recent post.

    Beyond that point, I see the relevant point he has made consistently throughout these various posts is that of the potential for monetary policy to affect exchange rates in the cases of different country pairs, and the likely knock effect of the exchange rate responses for those countries. And I think he’s been consistent.

    What he says in his recent post is that it is ridiculous for Europe to complain about the effect of further Fed easing on the dollar/Euro exchange rate, because the ECB can also ease with a countervailing effect on the dollar/Euro exchange rate. The reason he can argue this is that both regions have the ability to ease monetary policy, and the bilateral exchange rate floats. So there is a mutual ability to respond to the adverse effect of each other’s monetary easing on the exchange rate.

    BTW, this has nothing to do with the issue of Krugman’s interpretation of the effectiveness of the Fed’s easing capability at the zero bound. He has always been consistent on that issue in saying that unconventional easing is his second choice after fiscal easing, but given the dismal political timing and prospects for the implementation of such fiscal easing in the required material way, he is fully in favour of the Fed using whatever guns it has in the form of unconventional policy. He has been consistent in this view.

    On the issue of China, he has clearly said that Yuan appreciation is called for. You have accused him of being inconsistent there in that China could just as easily say that it is ridiculous for the US to complain about the effect of China not tightening its exchange rate policy (which can be translated as China easing when measured against the US policy benchmark recommendation for China tightening) because the US can also ease through its own monetary policy. Furthermore, you say his inconsistency is all the more glaring because according to you he converted only reluctantly to the view that US monetary policy could be effective at the zero bound.

    I disagree with that final point as I explained above. The rest of your argument also misses the point in my view, because the dollar/Yuan exchange rate is under the control of China. The issue is about the effect of monetary policy on exchange rates. You can’t argue that there is the same reciprocity of monetary policy effects on exchange rates in the case of the US and China as there is in the case of the Europe and the US. The US can’t affect the dollar/Yuan exchange rate through its monetary policy in the same way that Europe can affect the dollar/Euro exchange rate through its monetary policy. Therefore, Krugman’s absolute argument in the case of Europe is correct, and your relative argument in the case of China isn’t.

  34. Gravatar of Jeff Jeff
    18. October 2010 at 10:00

    I read Mish pretty regularly, but not for the economics therein, which seem pretty confused. Among other things, Mish uses his own definitions of money (the monetary base plus the market value of bank financial assets) and inflation (credit growth). He seems not to distinguish bank assets from bank liabilities.
    So why read him? Mostly because he is a fun read, and because on some topics, like the evils of public sector unions and the politicians who give in to them, he’s dead on. He was also presciently scornful of the reassurances various officials were giving us when the Greek debt crisis first came to public attention.
    Sometimes they really are out to get you.

  35. Gravatar of Master of None Master of None
    18. October 2010 at 10:10

    Congratulations Scott Sumner! Your blog is officially implicitly an “other place” according to Paul Krugman!

    http://krugman.blogs.nytimes.com/2010/10/18/were-not-china/

  36. Gravatar of scott sumner scott sumner
    18. October 2010 at 14:36

    Doc Merlin, Yes, I’m sure lot’s of reporters write those stories, but how many reporters understand that the theory of comparative advantage says weak environmental regs don’t give countries an advantage in trade?

    JKH, There are many problems with your comment:

    1. You start by denying Krugman claimed Europe was stuck in a liquidity trap, then have a very long explanation that exactly proves my point. He said for various institutional reasons (such as inability to lower rates below 1%) the Europeans could do no more to ease monetary policy. I agree. But I can’t for the life of me figure out why you think it supports Krugman. That’s exactly what I accused him of doing. First claiming the ECB could do no more, and then claiming that they could easily offset the disadvantage of a weak dollar by easing monetary policy. So your defense of Krugman merely proves my point.

    2. You are the first person I’ve ever heard claim Krugman is always consistent on monetary policy. In March 2009 I asked him to support UNCONVENTIONAL monetary stimulus. He replied that that won’t work because we are stuck at the zero bound. Almost everyone I talk to thinks he’s been wildly inconsistent on monetary policy. I don’t doubt that he has a consistent model in his mind, but his posts have been all over the place. I actually have to often defend him against my commenters, who think he is much more inconsistent than I do. He often makes unqualified assertions such as “monetary policy won’t work” without any reference to ‘unconventional.’ I’ve talked to many economists who read him, and if he is consistent, then he is the worst communicator in the history of journalism–because in 2009 even Democrats who like him had no idea that he thinks monetary stimulus can work. They’d say to me “but he’s always saying monetary stimulus won’t work because we are in a liquidity trap.”

    In defending Krugman on China you are bringing up an argument he hasn’t made. You seem to think the yuan is a special problem for the US because we can’t lower the nominal exchange rate. But that’s not Krugman’s argument. Go back and read his posts from 2009–he is crystal clear. He says if we were not at the zero bound, then we could offset China’s policy by using an expansionary monetary policy. But he says we can’t do that. He also said Europe can’t do that. Now he is saying that Europe can offset a weaker dollar with an more expansionary policy. So you are defending him using an argument he doesn’t believe in. It’s not necessary for the US to raise the yuan in order to neutralize its impact, we just need to raise AD through an expansionary monetary policy. That is Krugman’s argument, which is why all attempts to defend him will fail. He is being blatantly inconsistent–applying a much tougher standard on China than the US.

    Jeff, Thanks.

    Master on None, He still doesn’t see what he is doing wrong.
    I’ll have to do another post. By the way, notice he doesn’t use the defense JKH provided him with?

  37. Gravatar of JKH JKH
    18. October 2010 at 15:28

    Scott,

    I haven’t changed my mind, but thanks for the response.

    “You are the first person I’ve ever heard claim Krugman is always consistent on monetary policy.”

    That suggests to me he could be a lonely man. Perhaps I should figure out how to get my comment to him.

    :)

    “I’ll have to do another post.”

    Uh – oh

    I’ll watch it from here.

  38. Gravatar of ssumner ssumner
    19. October 2010 at 06:15

    JKH, I always use a bit of hyperbole. I assume DeLong thinks Krugman has been consistent.

    I do have a new post up. More Krugman bashing. Ryan Avent links to several others as well.

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