David Beckworth interviews Paul Krugman

Love him or hate him, there’s no denying that Krugman is a brilliant economist. David Beckworth’s interview with Krugman is probably my favorite so far in the series, even though on the policy issues I tend to agree more with earlier interviewees such as Bullard.  (Interestingly, these two agreed on a number of issues, despite being far apart on the political spectrum.)

There’s no transcript, so I’ll rely on memory, and then leave a few observations after each point:

1.  When discussing his famous 1998 paper, Krugman said the hard part was determining the implication of an “expectations trap” for policymakers.

This is a very good point, and most people underestimate this problem.  Krugman himself has changed his views as to the paper’s implication, in the years since it was published.

2.  He indicated that when trying to exit a liquidity trap, you don’t need to just convince the central bankers, you also need to convince the public.

I have a “build it and they will come” attitude here.  If the central bank adopts an effective policy response, I think the public will believe it.  The real problem has been the failure of central banks to be willing to adopt “do whatever it takes” policies.

3.  He suggested that price level targeting might not be enough—you might need a higher inflation target if the equilibrium real interest rate fell to very low levels, and stayed there.

Here my view is different.  A liquidity trap should not be viewed as zero nominal interest rates, but rather the zero bound on eligible assets that the central bank has not yet purchased.  Imagine a policy of targeting the price level with CPI futures. That policy will work regardless of how low the equilibrium interest rate falls, as low as the central bank has the ability to adjust its balance sheet to base money demand.  Ditto for exchange rate targeting (i.e. Singapore). Liquidity traps are not times when fiscal policy is needed, they are times when bigger central bank balance sheets are needed.

Krugman cites Japan’s falling population.  On the one hand that might reduce Japan’s equilibrium real interest rate.  But it also reduces aggregate supply, which is inflationary.

4.  Krugman noted that elite policymakers don’t think that an inflation target of higher than 2% is responsible.

My immediate reaction was “Hmmm, where did they get that idea.”  To his credit, Krugman later joked “I may have set back policy by decades with that credibly promise to be irresponsible remark.”

5.  The first QE in the US and Europe helped to restore confidence to economies that had been destabilized by private sector financial turmoil.

My reaction is that that financial turmoil was at least partly caused by bad monetary policy, which was causing NGDP growth expectations to plummet.

6.  Krugman points out that Congress would have objected to a higher inflation target.

I think that’s right, but other options like PL targeting and NGDP targeting we at least possibilities.  More importantly, the Fed could have kept the inflation target at 2% and done far more in the realm of “concrete steppes”.

7.  Krugman’s ideal policy back in 2009 would have been enough fiscal stimulus to get inflation up to 4%, followed by standard monetary policy to stabilize the economy after that (presumably something like policy during the Great Moderation, except with a high enough inflation target to prevent hitting the zero bound.)

That might work, but if you raised the inflation target to 4%, then I doubt you’d even need fiscal stimulus.

8.  On whether 2% was a target or a ceiling, Krugman actually seemed less cynical than David (which might surprise people given their personalities).

I tend to agree with Krugman on this point, but I also believe that David has the better argument, and this is one place where Krugman struggled a bit to refute it. He talked about central bankers wanting to go back to the old days of Volcker, when they fought a heroic battle against inflation, and he also talked about the Fed as an institution having a bias toward fighting inflation.  Of course you could view those observations as supporting David’s claim about 2% being a ceiling, and I sensed that Krugman saw that as well.

9.  Krugman suggested that he had mixed feelings about NGDP targeting, worrying that it might allow too much inflation volatility.

Here again, he struggled a bit in his reply.  At one point he tried to suggest a scary counterfactual of 1% RGDP growth and 4% inflation, and then immediately seemed to realize that a few minutes earlier he had advocated 4% inflation.  In my view Krugman missed the point here.  A period of 1% RGDP trend growth is precisely when you are likely to see the sort of low equilibrium real interest rate that Krugman himself thinks calls for 4% inflation target.  Admittedly I am relying a bit on a sort of “divine coincidence” of RGDP trend growth and equilibrium real interest rates moving together, but I also think there are strong labor market reasons to prefer NGDP targeting. Krugman said something about menu costs of inflation, but surely he cares more about unemployment than menu costs, and labor market stability is almost certainly more closely correlated with NGDP than inflation. Indeed an awareness of that fact (in my view) largely explains why central banks have “flexible” inflation targets.

Like most other mainstream economists, Krugman doesn’t seem aware of all the arguments for NGDP targeting made by market monetarists, and even earlier by George Selgin.  We still have work to do.

Overall a great interview.  Krugman said, “I don’t really know” more often than one might expect from reading his NYT columns, which is to his credit.

I used to think his bashing of the GOP was exaggerated, but now it seems on target.  I say he’s finally got it right, whereas Krugman would presumably say that Trump proves that he was right all along.




17 Responses to “David Beckworth interviews Paul Krugman”

  1. Gravatar of Effem Effem
    16. May 2017 at 06:59

    Was good to see he’s realized that “credibility” is a huge challenge. This is under-appreciated. How can any central bank mandate ever be “highly credible” in a democracy? We’ve already seen that very surprising political outcomes are possible even in fairly benign environments. It wouldn’t take much for Donald Trump to massively alter the makeup/philosophy of the Fed.

    When taking the volatility of politics into account, the ideal system is one which can handle changes in monetary policy without being plunged into crisis. This seems to be the exact opposite of what every economist recommends (an “ideal” policy which is highly credible and thus creates an entire economy dependent on that mandate being achieved).

  2. Gravatar of Randomize Randomize
    16. May 2017 at 07:49

    My gut tells me that Japan’s shrinking workforce has far stronger deflationary impacts than inflationary ones. Imagine all that excess capacity: vacant lots, machines sitting idle, freeways running smoothly…

    Actually, that last part doesn’t sound so bad…

  3. Gravatar of George Selgin George Selgin
    16. May 2017 at 08:11

    It’s apparent throughout Krugman’s discussion of his 1999 paper that, like many economists of the time, he takes for granted a situation in which there is no such thing as an excess demand for money or its equivalent: a price level that is above the market-clearing price level. It’s only with this assumption implicitly in mind that one can argue that getting out of a liquidity trap requires a higher inflation rate, and not just a higher rate of money growth.

    Of course Krugman is far from alone. Relatively few macroeconomists bother to distinguish between changes in the equilibrium price level or inflation rate from changes in those variable’s actual values. In normal times the failure does little harm. But in a state of recession or depression, where the evidence suggests an excess demand for real money balances, it becomes very harmful to sound analysis. Recessions happen, not because people fail to have high-enough inflation expectations, but because their inflation expectations are too high relative to the actual state of aggregate demand. The goal of monetary policy must then to be restore AD to levels consistent with the public’s expectations–not to raise those expectations still further!

  4. Gravatar of bill bill
    16. May 2017 at 09:08

    @randomize, Check out accounts of the Black Death. All that die off resulted in higher wages. Ironically, most historians present that fact as if it’s obvious.

  5. Gravatar of Jose Jose
    16. May 2017 at 10:03

    “Krugman suggested that he had mixed feelings about NGDP targeting, worrying that it might allow too much inflation volatility”

    If people understood well how inflation is estimated, as opposed to “measured”, and the level of noise contained in those estimates, this should no even enter a list of main concerns…

  6. Gravatar of Tuesday assorted links – Marginal REVOLUTION Tuesday assorted links - Marginal REVOLUTION
    16. May 2017 at 11:06

    […] 7. Sumner summarizes Beckworth and Krugman. […]

  7. Gravatar of bill bill
    16. May 2017 at 11:27

    Krugman’s case against NGDP targeting included that RGDP could grow by 4%. Here’s his post on the likelihood of 3% to 3.5% (“implausible – not impossible..”).

  8. Gravatar of Todd K Todd K
    16. May 2017 at 11:30

    For a very long time, Krugman mostly blew off technological advances and the future potential of IT. Health care in 2030? Sort of like today with a few advances but likely much more expensive, etc.

    Yet from 2013 or so, he seemed to change his tune and at the end of this interview says he is more agnostic now.

    In one interview in 2013, he said (paraphrase) “We all thought that driverless cars were decades away but now it looks like they’ll be here soon.”

    Who is this “we”, Paul? Many who have been interested in IT have understood this since 2004 and a small percentage since the mid 90s.

  9. Gravatar of ssumner ssumner
    16. May 2017 at 12:10

    George, I have a third view. I think what Krugman is assuming is that the central bank has limits on its balance sheet. If inflation is too low then the demand for base money might exceed the legally allowed Fed balance sheet. My suggestion in that case is to allow a bigger balance sheet, not fiscal stimulus (which is his view). He’d respond that a bigger balance sheet is fiscal policy, a view I don’t accept (and I am pretty sure you don’t either.)

    I’m not sure he denies P can exceed P*, I think what he’d argue (as with other Keynesians), is that attempts to reduce P will also reduce P*. (I disagree on that point as well.)

  10. Gravatar of George Selgin George Selgin
    16. May 2017 at 12:43

    Scott, does Krugman explain what he means by legal limits on the size of the Fed’s balance sheet? So far as I’m aware–and so far as recent experience shows–their aren’t any.

    In any case,the Fed itself contributed (as you know) to the extraordinary demand for base money when it began paying IOER, and contributed still further when it proceeded to implement Basel’s LCR rules.

    Finally, I’m not recommending deflation as a solution to P* P*, monetary expansion can contribute to recovery without raising P, because it has only to raise P* up to the point at which it is = P.

  11. Gravatar of George Selgin George Selgin
    16. May 2017 at 12:47

    Oops! This editor treats inequalities as something else, and so cut-out a bunch of my last paragraph! So:

    “Finally, I’m not recommending deflation as a solution to P* is less than P*; I recognize the Keynesian as well as non-Keynesian argument against relying on that approach. I’m merely pointing out that, when P* is less than P, monetary expansion can contribute to recovery without raising P, because it has only to raise P* up to the point at which it is = P.

  12. Gravatar of Donald Pretari Donald Pretari
    16. May 2017 at 13:08

    “Krugman’s ideal policy back in 2009 would have been enough fiscal stimulus to get inflation up to 4%, followed by standard monetary policy to stabilize the economy after that (presumably something like policy during the Great Moderation, except with a high enough inflation target to prevent hitting the zero bound.)

    That might work, but if you raised the inflation target to 4%, then I doubt you’d even need fiscal stimulus.”

    This was the Chicago Plan of 1933 I advocated going back to 2008. I feel no need to change my views even now.

    On Paul Krugman, I’ll give an explanation for his different personas that I’ve posted many times before. Years ago, I knew a sports columnist for a major San Francisco paper. I didn’t know him well, but I knew him well enough to know that he was a humble and moderate person. On the other hand, his columns often sounded like diatribes. When I mentioned this to another friend who was a well know novelist and who knew the sportswriter better than I did, he explained to me that, in order to have that column, the sportswriter needed to be contentious. The paper wanted columns that got people phoning in to talk radio, etc., not columns that caused people to yawn in agreement.

  13. Gravatar of Christian List Christian List
    17. May 2017 at 04:19


    Check out accounts of the Black Death. All that die off resulted in higher wages.

    Or wages after WWII.

  14. Gravatar of David Becworth David Becworth
    17. May 2017 at 07:06

    Thanks Scott for the plug and the comments on it.

  15. Gravatar of Saturos Saturos
    17. May 2017 at 11:46

    It occurs to me that someone who set up a face-to-face between Scott and Paul Krugman could potentially save the world trillions of dollars in future income.

    (Also, I have to say I’ve done a 180, and it turns out Krugman was not an extremist but exactly right about the Republicans all along. Every day they return to the Hill they spit in the face of their Constitution, intended to prevent tyrants like Trump wants to be. They must really hate their country.)

  16. Gravatar of ssumner ssumner
    18. May 2017 at 06:31

    George, I believe Krugman thinks there are political limits on the size of the balance sheet, not technical limits.

    I agree with your comments on P and P*

    Saturos, Thanks, but you are being way too generous.

    Was Krugman right when he said Trump was just like other Republicans, or later when he said Trump was nothing like other Republicans?

    He reminds me of Roubini—it you keep saying something for long enough, eventually the world will change and you will be correct.

  17. Gravatar of flow5 flow5
    19. May 2017 at 09:35

    Professional economists matriculated at the wrong schools – certainly not in the real world combination of free and manipulated markets. Beckworth’s article/interview with “Mr. Friday the 13th”, is a joke (Barnett’s Divisia aggregates, Friedman’s monetary base, etc.).

    And even if targeting N-gDp was a good idea, it is impossible under an IOR regime (as the latest policy rate hikes clearly demonstrate). And remunerating IBDDs exacerbates secular strangulation (chronically deficient AD). The 1966 S&L credit crunch (where the term was first coined), is the prologue and paradigm.

    Targeting N-gDp caps real-output and maximizes inflation period. How stupid, esp. coming out of a recession (one that the monetary authority obviously didn’t see coming). You can’t hit a target that nobody even with their un-necessary sophisticated modeling (even a futures market), can’t see.
    This is so even though money growth propagation is, contrary to Bernanke, markedly robust.

    No, all economists theories have no clear nexus with the natural pulse of economic life. Economists are creating a permanent economic depression.

    All voluntary savings originate within the commercial banking system. I.e., time (savings) deposits are not a source of loan-funds for the commercial banking system, rather bank-held savings are the indirect consequence of prior bank credit creation (derivative not primary deposits to any bank)– and the source of core bank deposits can largely be accounted for by the expansion of bank credit. In other words, an increase in time/savings accounts depletes demand deposits, etc., by the same amount. Since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot, per se, increase the size of the banking system. The expansion of time deposits, per se, adds nothing to total bank liabilities, assets, or earning assets.

    Monetary savings are never transferred out of the system (unless currency is hoarded, or converted to other national currencies). But bank-held savings are idle, un-used and un-spent. Bank-held savings are lost to both consumption and investment.

    The only way for the saver/holder to utilize/activate, directly or indirectly, the existing stock of savings is outside of the banking system through non-bank conduits (which increases the supply of loan funds, but not the supply of money). Said savings never leave the system. I.e., non-bank lending/investing is a velocity relationship – where title to commercial bank deposits is transferred (exchanges counter-parties).

    Money velocity, MZM velocity, has fallen since 1981 because of two reasons: (1) an increasing proportion of savings have been bottled up. And (2) as professor Lester V. Chandler originally theorized in 1961, viz., that in the beginning: “a shift from demand to time/savings accounts involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of money”. His conjecture was indeed true up until 1981 – up until the saturation of financial innovation for commercial bank deposit accounts (the widespread introduction of ATS, NOW, and MMDA bank deposits).

    The remuneration of IBDDs exacerbates the decline in Vt (subpar economic growth). The celestial pulse (what Krugman doesn’t understand and can’t do): As I said on 12-16-12, 01:50 PM (because of the expiration of unlimited FDIC Insurance coverage: “Jan-Apr could be a zinger”, or “predictive success”). As I said: “Raise the remuneration rate and in a twinkling, the economy subsequently suffers. – Apr 28, 2016

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