Do or do not, there is no try (Why Krugman is almost as dangerous as Taylor and Feldstein)

Here’s Paul Krugman:

Actually, before I get there, a word about self-styled conservative “market monetarists”: guys, have you noticed who your real policy enemies are? People like me, Brad DeLong, etc. are skeptical about the Fed’s ability to offset the effects of fiscal austerity, but we do want it to try. The furious academic opposition to quantitative easing is instead coming from moderate conservative macroeconomists, notably Taylor and Feldstein. So your problem isn’t just that the GOP’s effective leader on economic issues gets his macro from Francisco D’Anconia; it’s that even the not-so-silly wing of the party is dead set against what you consider reform.

A few points:

1. The Fed should not give monetary stimulus a try; they should do it.

2. We don’t favor the same monetary policy.  If we did they wouldn’t favor fiscal stimulus.

3.  We want the Fed (and ECB and BOJ) to do whatever it takes (including buying up all of planet Earth if necessary) to equate the target and the forecast (hopefully of NGDP.)  If the Fed does that, fiscal stimulus can do nothing but harm.

4.  Some might argue that the Fed doesn’t know how to target the forecast.  And yet when I presented my NGDP futures targeting idea at the NY Fed in the 1980s their attitude was basically; “thanks be we already know how to do our job.”  I take them at their word, but would be happy to do a return visit

5.  The failure of monetary policy is partly bad motives (Rick Perry, etc) and partly ignorance.  I find it hard to believe that ignorance isn’t the biggest part.  I really can’t see how the entire western world would have created this needless catastrophe if they had know from the very beginning that the Fed and ECB could have easily prevented it, without running up debt (indeed shrinking deficits) and without high inflation.  Why don’t people understand that monetary policy could have prevented this?  When I talked to liberal intellectuals in 2008 and 2009 they almost all told me that we needed fiscal stimulus, because the Fed was out of ammunition.  When I asked them where they got that crazy idea, roughly 100% cited a certain famous Nobel-prize-winning public intellectual.

Yes, they misread his message to some extent, but then didn’t Mr. Krugman recently blame Rogoff and Reinhart for not working hard enough to prevent their message from being misinterpreted?

6.  President Obama appointed 6 of the 7 members of the Board of Governors.  In 2009 when he had a filibuster-proof majority he didn’t even bother nominating people for several open positions.  He’s never shown any interest in monetary stimulus.  He gets his ideas from people on the left.  (Not to absolve Obama–he ignored Romer.)

7.  The failure of monetary policy in recent years is not just a “zero bound” issue.  During the vast majority of the past 4 years, important central banks such as the ECB and Riksbank have almost never been at the zero bound, but rather have been raising and lowering rates as conditions changed.  The failure is much deeper.

8.  As far as I know no major public intellectual, on either the left or the right, has ever presented a plausible model explaining why QE is riskier than massive fiscal debts leading to an ever increasing national debt.  So why do we let the Fed get away with that excuse?  I do recall Paul Krugman warning in 2009 that QE could be risky.  Yes, he supported it anyway, but the perception of risk has unfortunately taken a lot of pressure off the Fed.  Why isn’t the economics profession demanding the Fed do more?  Why do the overwhelming majority of economists oppose a more expansionary monetary policy (despite many seeing a need for more AD?)

9.  By taking the focus off of monetary policy, we’ve been led down a long and fruitless diversion into fiscal stimulus.  Given that the Fed is using QE and various signaling techniques to target inflation and employment, what evidence is there that the unemployment rate in May 2013 would be higher than 7.6% if we had done less fiscal stimulus?  Yes the focus is gradually returning to monetary policy, where it should have been all along.  But the fiscal diversion was incredibly costly.

10.  I have criticized Krugman more than any other single economist.  But I’ve also criticized the right on literally hundreds of occasions, including earlier today.  There is no one on the right, who also opposes monetary stimulus right now, who is anywhere near as influential and persuasive as Krugman.  He should take it as a complement that I’m obsessed with him.  I don’t waste very much time on arguments that are so obviously wrong that they are hardly worth debating.  (I.e. that inflation is the “real problem.”) His mistakes tend to be quite subtle; it’s a challenge to find flaws in his arguments.  He mentions Meltzer in the post.  A few years ago I did a post when Krugman and Meltzer first tangled–and said Krugman would be proved right and Meltzer would be proved wrong.  The old-style monetarists and the austerians have been dead in the water for several years.  I go after the only group still standing in the way of global market monetarist dominance—the Keynesians.

11.  I’ve done numerous posts praising Krugman, including suggestions he be put on the Fed.  I’ve admitted he was right and I was wrong on certain points, notably the willingness of the Fed to be aggressive at the zero bound.

12.  Tribalism?  Perhaps, who can really judge their own motives?  But I’d say it’s more likely annoyance at his tone, if you want to look for an “irrational” explanation for my obsession.  If Krugman didn’t exist I’d probably be obsessed with the next best annoying brilliant blogger on the left, perhaps DeLong.  Say what you will, but I don’t call Krugman a fool or a knave.  The closest was when I once called him “ignorant” but that was in response to a post where he proudly claimed to be ignorant of what conservative bloggers had to say.

13.  The most vicious fights tend to be among different sects of the same church.

14.  He started it.  The very first Krugman post I did reached out for his support on monetary stimulus–he slapped me down.

15.  What have I forgotten?  (Obviously not insults from 4 years ago.)

PS.  The planet Earth comment was half-joking—with a 5% NGDP target the demand for base money would fall, and hence additional QE would probably not be needed.

PPS.  Maybe the Krugman comments weren’t addressed at me.  In which case . . . nevermind.


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87 Responses to “Do or do not, there is no try (Why Krugman is almost as dangerous as Taylor and Feldstein)”

  1. Gravatar of Geoff Geoff
    7. June 2013 at 11:18

    “We want the Fed (and ECB and BOJ) to do whatever it takes (including buying up all of planet Earth if necessary)

    Insanity.

  2. Gravatar of Edward Edward
    7. June 2013 at 11:24

    He’s being facetious, you imbecile.

  3. Gravatar of TravisV TravisV
    7. June 2013 at 11:33

    I love this formulation from Prof. Sumner:

    http://www.themoneyillusion.com/?p=20919

    “I’ve argued that QE should increase by 20% per month, until we are out of the zero rate bound, or the Fed owns planet Earth, whichever comes first.”

  4. Gravatar of Iván Carrino Iván Carrino
    7. June 2013 at 11:46

    I’m kind of new to Mkt Monetarism so I am sorry if my questions are too basic

    1) why would it be harmful to use fiscal stimulus to boost AD but monetary policy is ok? Fiscal stimulus can put you in debt but a “loose” monetary policy can generate inflation or depreciate the dollar…

    2) is your difference with Krugman only about your hope on monetary policy? You being more optimistic while Krugman is less and therefore suggests more spending?

    3) finally, are you saying monetarists and keynesians are different sects from the same church?

  5. Gravatar of Bob Bob
    7. June 2013 at 11:46

    Scott,
    I think the country would benefit from you and PK calming down. I happen to believe that MM is the best policy for a central bank, but I also believe that we could have benefited from other policies during recent years and the near future, while the economics community slowing comes to embrace MM. More stimulus, particularly state aid could have averted a lot of suffering. An recall, that Bernanke recommended that congress do more stimulus. I find it hard to believe that he would have offset stimulus that he himself requested. PK should admit that he dances back and forth on whether the zero lower bound is real or not, but he did call for BOJ to set a higher inflation target years ago, and has repeatedly recommended the same over recent years. The two of you should be able to find a compromise platform that would be affective at restoring AD. Like it or not, you shape opinions now. You’ve certainly shape mine. If you and PK could build a big tent, the two of you could affect policy. If your goal is restoring AD, you should do that. If your goal is winning the great debate, then you shouldn’t criticize Rick Perry. Just saying.

  6. Gravatar of jknarr jknarr
    7. June 2013 at 11:53

    Right-left is a false paradigm. The battle has always been between hard- and soft- money. Public debate over monetary policy is so deep in the disinformation tank that we don’t even know which way to swim out.

    The hard money crowd has a complete lock on both the “left” and “right” terms of analysis and debate. I’d advise jettisoning the left-right framework entirely — its a red herring.

    Reality is all about the power that hard money gives to wall street and DC. Krugman is 100% part of that axis.

    Look up the “crime of ’73” — the coinage act of 1873 — and re-read the “cross of gold” speech. This is a very old conflict in America. Krugman is not good-faith analysis, he is bad-faith propaganda for the hard money interests. That’s why he has the NYT bullhorn to propagandize the stupid/smart set.

    It’s hard to engage bad faith — we hardly have the tools to do so — and that’s why they maintain their hammerlock on monetary policy. It’s an odious book, but Rules for Radicals has some good hints about how to fight the fight more effectively.

  7. Gravatar of Cory Cory
    7. June 2013 at 11:57

    Professor Sumner,

    I’m very impressed with everything you’ve written with regard to Market Monetarism over the last couple of years and the idea that the FED could end this if it wanted.

    I’m not sure if this is the right place to ask this question considering it might be off topic from your post but I figured I would anyway.

    You mention how if Delong and Krugman wanted the type of Monetary Stimulus that you’re asking for, “…they wouldn’t be asking for fiscal policy because it can only do harm.”

    So in a world where the FED embarks on the type of sufficient monetary stimulus you suggest (i.e. NGDP futures targeting) and then suddenly Congress becomes functional and concurrently passes, say, a total elimination of the Payroll Tax Cut as a fiscal stimulus measure, I presume you would suggest that such a stimulative tax cut measure would actually be counter-productive, yes?

    So, If we’re to assume that such a tax cut would be politically popular, if Congress were actually functional (big assumption), should we give any weight to stimulative fiscal policy that the polity actually desires even though the FED could solve the problem on its own?

    I guess I’m asking, in some more perfect world where Congress and the Public actually understands that Fiscal Policy would harm the FED’s monetary stimulus efforts and knows that the FED can improve the economy on its own…what if the public actually would prefer stimulative fiscal policy rather than monetary stimulus anyways???

    Basically, rather than Central Banks “being incompetent” as you call it….the Public simply says “No, we don’t want you to do it all on your own with NGDPLT…we’d rather have at least some Fiscal Policy instead”.

  8. Gravatar of Cory Cory
    7. June 2013 at 12:06

    Meant to Say “Total Elimination of the Payroll Tax” Not “Total Elimination of the Payroll Tax Cut”…DERP.

    But again, thank you for putting this all out there on your blog for us casual readers of the the econoblogosphere to read.

  9. Gravatar of Robert Robert
    7. June 2013 at 12:09

    Milton Friedman:

    “Buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion.”

  10. Gravatar of Iván Iván
    7. June 2013 at 12:21

    Jknarr do you claim Krugman is on the “hard money” side of the debate?

  11. Gravatar of TallDave TallDave
    7. June 2013 at 12:24

    That’s so funny, I just made the same point as Krugman earlier today.

  12. Gravatar of TallDave TallDave
    7. June 2013 at 12:25

    Although on 5, I should point out again you are being unfair to Rick Perry (who was wrong, but not from bad motives).

  13. Gravatar of marcus nunes marcus nunes
    7. June 2013 at 12:32

    Scott
    As if to prove his point, PK´s very next post after the one he “slapped you down” was called “Friedman and Schwartz were wrong”:
    http://krugman.blogs.nytimes.com/2009/03/02/friedman-and-schwartz-were-wrong/
    Clearly he was trying hard to show that without fiscal stimulus…

  14. Gravatar of foosion foosion
    7. June 2013 at 12:37

    >>I really can’t see how the entire western world would have created this needless catastrophe if they had know from the very beginning that the Fed and ECB could have easily prevented it, without running up debt (indeed shrinking deficits) and without high inflation.>>

    The very top of the income/wealth distribution has done very well. That happens to be a group with an extraordinary amount of political and economic influence, including among other things, by funding or otherwise rewarding think tanks, public intellectuals and media who agree with them. Is it a coincidence that they support austerity and tight money?

  15. Gravatar of TravisV TravisV
    7. June 2013 at 12:48

    TallDave,

    Awesome, why didn’t you tell us you write on a blog????

  16. Gravatar of ChacoKevy ChacoKevy
    7. June 2013 at 12:58

    “self-styled conservative “market monetarists””
    Wait, is MM strictly conservative? Now I need clarification on what he said three days ago:
    “Barro likes to claim that market monetarism, which he insists has been a big winner, is an achievement of conservative reformers. I’d dispute just about all of that, but never mind right now.”
    I initially thought he was saying it wasn’t a conservative hatched idea. Is he now suggesting it isn’t an achievement?

    Seriously, I need to know. If I’m a conservative now, I’m afraid my hippie friends will kick me off the ultimate frisbee team.

  17. Gravatar of Don Geddis Don Geddis
    7. June 2013 at 12:59

    @Iván Carrino: “why would it be harmful to use fiscal stimulus to boost AD but monetary policy is ok?

    Because: (1) fiscal stimulus increases long-term debt while monetary policy is free; (2) fiscal stimulus requires the government to “pick winners” (or build bridges to nowhere), rather than using the far more efficient free market; (3) fiscal stimulus is slow and underpowered, while monetary policy is immediate and (essentially) omnipotent.

    Fiscal stimulus can put you in debt but a “loose” monetary policy can generate inflation or depreciate the dollar

    You don’t have a unified theory of aggregate demand. If fiscal stimulus “works” to fix the economy, it only works by increasing AD. AD is the same feature that leads to inflation.

    (Too much) stimulus (either fiscal or monetary) could indeed lead to inflation (or change exchange rates). But there is no sense in which fiscal stimulus is “effective [at AD], but safe [at inflation]”, while somehow monetary stimulus has these additional dangers.

    The dangers exist, but are the same for both approaches. Monetary stimulus is simply better in every way.

  18. Gravatar of Don Geddis Don Geddis
    7. June 2013 at 13:03

    @Bob: “I also believe that we could have benefited from other policies during recent years and the near future, while the economics community slowing comes to embrace MM. More stimulus, particularly state aid could have averted a lot of suffering.

    Having the economics community more quickly embrace Market Monetarism would also have averted a lot of suffering. Why are you so excited about a band-aid, instead of putting all efforts towards fixing the problem for real? Especially since the solution is already known?

  19. Gravatar of Don Geddis Don Geddis
    7. June 2013 at 13:07

    Cory: “what if the public actually would prefer stimulative fiscal policy rather than monetary stimulus anyways?

    The public should have any budget that they wish. But they should evaluate each proposed government program, using a cost/benefit analysis. If they want to borrow and go into debt, in order to build infrastructure, then that’s fine.

    What we’re trying to do, is eliminate the justification: “we need to borrow and spend in the fiscal budget, in order to raise aggregate demand.” That should never be an excuse for spending tax money. There is no role for the fiscal authority, in managing aggregate demand. AD is completely controlled by the central bank.

    If the public wants to have a tax cut, and perhaps increase its debt, that’s a different story. But it has nothing to do with managing aggregate demand.

  20. Gravatar of jknarr jknarr
    7. June 2013 at 13:21

    And Geoff/Edward — buying the entire planet is neither insanity nor facetious. If the US Fed ever had the chance to hit the offer, done — we’d give them scraps of paper for real assets. Who would be laughing then?

    IMHO they should be buying real assets — gold if they want it relatively sector-neutral — instead of Treasury scrip. We’d get a counterparty-free asset on the balance sheet and achieve monetary expansion. Priceless.

  21. Gravatar of TravisV TravisV
    7. June 2013 at 13:56

    Has anyone read this new presentation by Brad DeLong on “Normalization”? Fascinating stuff!

    http://delong.typepad.com/sdj/2013/06/brad-delong-normalization.html

  22. Gravatar of Daniel Daniel
    7. June 2013 at 14:11

    I’d been wanting a nice sharp picture of the policy difference between you and Krugman. This is perfect. Thank you.

    And it’s a nice point about Reinhart-Rogoff’s emphasis problem being nearly the same problem as when Krugman treats QE as kind of an afterthought.

  23. Gravatar of libertaer libertaer
    7. June 2013 at 14:40

    “I really can’t see how the entire western world would have created this needless catastrophe if they had know from the very beginning that the Fed and ECB could have easily prevented it, without running up debt (indeed shrinking deficits) and without high inflation.”

    I talked to a lot of people here in Germany, which is the home of hard money fetishism. I think it’s not so much the ZLB, but zero or negative real interest rates which makes them furious. Hard money types feel entitled to a positive real interest rate, they don’t get the concept of a medium of exchange, for them the essence of money is to store value. A negative real interest rate is like theft for them. It’s like erasing a point you already scored in a game. They feel betrayed.

    That’s why for them unemployment is deserved if real rates are zero or negative. If I can’t get a positive return, why should you have a job? You should be unemployed! For them unemployment must be structural if rates are zero.

    For most Germans unemployment in the eurozone is not a bug, it’s a feature. It’s like a beating that workers are getting for not being able to deliver a sufficient interest rate.

    I agree that it’s not just bad motives (party politics), but it’s not just ignorance either. It’s a false sense of entitlement, a perverted form of righteousness.

  24. Gravatar of Dave Gulley Dave Gulley
    7. June 2013 at 14:45

    Scott,

    I think this might have been one of your best, or at least most most forceful, posts. This ought to be forwarded to Mario Draghi, who seems so bent on getting the euro zone governments to get their acts together (to be sure, a good goal) that he’s willing to keep the zone in a recession until the politicians act. That, or he really doesn’t get it.

  25. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    7. June 2013 at 14:47

    The other day, on a German train, the gentleman in front of me was reading some magazine. On the back, it advertised a few loony books.

    I could not help but smile when I noticed it was a mix of:

    “The neoliberal threat: how free-markets are undermining third-world countries and will soon destroy our society”, you know the kind.

    and

    “Money: why it isn’t worth anything anymore” and at least one gold-standarty sounding tome.

    It was like bizarro-world Reason.

    *

    Krugman is a genius, but he decided to become a partisan hack. As partisan hacks go, he’s a truly spectacular partisan hack. But a partisan hack, nonetheless.

    What a waste of genius.

  26. Gravatar of Mark Barbieri Mark Barbieri
    7. June 2013 at 15:31

    Dr. Krugman’s comments made more sense to me when I realized that he had two different jobs. In one job, he is an academic (and presumably a very good one). In his other job, he is a highly compensated entertainer along the lines of Rush Limbaugh and Bill O’Reilly. He intentionally attacks straw men, knowingly distorts his opponents views, and frequently stretches the truth because it appeals to his audience. Honest, reasonable people on all sides of the debate generate far less controversy and consequently sell far less advertising. If he didn’t do it, someone else would and that person would be famous and widely discussed.

  27. Gravatar of Steve Steve
    7. June 2013 at 16:51

    http://krugman.blogs.nytimes.com/2008/03/17/how-close-are-we-to-a-liquidity-trap/

    March 17, 2008, 10:49 am
    How close are we to a liquidity trap?

    Here’s one way to think about the liquidity trap “” a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero, open-market operations in which the central bank prints money and buys government debt don’t do anything, because you’re just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that there’s no incentive to lend out any increase in the monetary base, because the interest rate you get isn’t enough to make it worth bothering.

    Normally it doesn’t matter which short-term interest rate you choose “” the Fed funds rate, which Uncle Ben sets, is usually very close to the interest rates on US government debt. But right now we’re in a situation in which Treasury bills yield considerably less than the Fed funds rate; to at least some extent this may reflect banks’ nervousness about lending to each other, even in the overnight market. And to the extent that’s true, Treasuries “” not Fed funds “” are the interest rates to look at.

    As of 10:38 this morning, the one-month Treasury rate was 0.57; the three-month rate was 0.825.

    Are we there yet? Pretty close.

  28. Gravatar of Steve Steve
    7. June 2013 at 16:59

    And then in SEPTEMBER 2008, Krugman wrote a post-mortem on monetary policy:

    http://krugman.blogs.nytimes.com/2008/09/22/the-humbling-of-the-fed-wonkish/

    September 22, 2008, 7:54 am

    The humbling of the Fed (wonkish)


    You still see people saying, in effect, “never mind the zero interest rate, why not just print more money?” Actually, the Bank of Japan tried that, under the name “quantitative easing;” basically, the money just piled up in bank vaults. To see why, think of it this way: once T-bills have a near-zero interest rate, cash becomes a competitive store of value, even if it doesn’t have any other advantages. As a result, monetary base and T-bills “” the two sides of the Fed’s balance sheet “” become perfect substitutes. In that case, if the Fed expands its balance sheet, it’s basically taking away with one hand what it’s giving with the other: more monetary base is out there, but less short-term debt, and since these things are perfect substitutes, there’s no market impact. That’s why the liquidity trap makes conventional monetary policy impotent.

    But why not purchase stuff other than T-bills? This can be thought of as changing the composition of the Fed’s balance sheet, rather than enlarging it; and Ben Bernanke, in happier days, thought that might be an effective policy in a liquidity trap.

    There are, however, three reasons to be doubtful about this stuff:

    1. The Fed is now trying to move a much bigger rock: it is, in effect, trying to raise the price of financial assets other than T-bills by selling T-bills and buying other stuff. There’s only (yes, “only”) $800 billion of monetary base. There are, by contrast, many trillions of stuff other than
    T-bills, so the Fed has to make huge changes in its balance sheet to achieve any noticeable effect.

    2. T-bills and other assets, such as long-term bonds, are probably much better substitutes for each other than T-bills are for monetary base “” money is unique as a medium of exchange, whereas once you get past that you’re only talking about competing stores of value. So it should take much larger changes in relative supplies to get major changes in asset prices.

    3. The reason T-bills are an imperfect substitute for, say, corporate bonds “” to the extent they are “” is risk. Therefore, the reason changing the composition of the Fed’s balance sheet can move prices, to the extent it can, is because the Fed is taking on risk. This isn’t a role the central bank is meant to play; you’re sliding over into fiscal policy.

    Nonetheless, I guess the Fed had to try the “Bernanke twist.” And it did “” the old Fed balance sheet, in which T-bills were the vast bulk of assets, is no more. But the effects have been disappointing, especially weighed against the risk, which I know is making Fed officials very nervous.

    And now, with the Paulson plan “” about which I have my doubts “” responsibility is clearly shifting from the Fed to the fiscal authorities.

    So Ben Bernanke came into his current position believing that central banks have the power, all on their own, to fight Japan-type problems. It seems that he was wrong.

  29. Gravatar of Steve Steve
    7. June 2013 at 17:02

    http://krugman.blogs.nytimes.com/2008/09/22/the-humbling-of-the-fed-wonkish/

    September 22, 2008, 7:54 am


    So Ben Bernanke came into his current position believing that central banks have the power, all on their own, to fight Japan-type problems. It seems that he was wrong.

  30. Gravatar of Geoff Geoff
    7. June 2013 at 17:04

    Edward:

    “He’s being facetious, you imbecile.”

    Just so you know Ed ol’ buy, I take insults coming from you as extremely generous compliments, because your knowledge is shallow and your ethics are twisted.

    Facetious? Actually, it logically follows from holding NGDPLT as “the” goal, for it is not mutually exclusive of the Fed buying unlimited amounts of assets. If for whatever reason, people’s cash holding times increased, such that the Fed would have to buy the S&P in order for NGDP to be at some arbitrary number they pulled out of their arses, then NGDPLT calls for just that.

    Plus, he said he was “half joking”, which of course means he was half serious. Being even half serious about the Fed buying up everything is reckless and intellectually permissive enough.

    I could say I am sorry for challenging your master, but that would spoil the fun.

  31. Gravatar of ssumner ssumner
    7. June 2013 at 17:10

    Ivan, You said;

    “Fiscal stimulus can put you in debt but a “loose” monetary policy can generate inflation or depreciate the dollar…”

    No, fiscal stimulus is every bit as inflationary as monetary stimulus, for a given rise in NGDP.

    2. We have other differences.

    3. We both think demand shocks are very important.

    Bob, You said;

    “An recall, that Bernanke recommended that congress do more stimulus. I find it hard to believe that he would have offset stimulus that he himself requested.”

    I just wrote a paper on this, and it should come out fairly soon. He also says things that imply he would offset it, such as the Evans Rule. So it’s a question of which of his statements of his you believe.

    I did reach out to Krugman in 2009, seeking a common platform. I’m still willing.

    Cory, I’d put it this way. With optimal monetary policy the Congress should do whatever fiscal policy they’d do if they were not trying to stabilize the macroeconomy, just judging the fiscal policy on its cost/benefit merits.

    Robert, The conservative movement has been adrift ever since Friedman died.

    Marcus, Good find.

    Foosion, That’s wrong on two counts:

    1. The crisis hurt the rich, even today they are worse off than in 2000.

    2. If you put 10 random academic economists into the Fed, they would have done roughly the same (if not tighter), even if they were not trying to help the rich. I meet very few academic economists who see their life’s mission as being to make life more comfortable for the rich at the expense of high unemployment. Sorry, but your theory is not plausible.

    Obama appointed 6 of the 7 board members, and just raised taxes on the rich. Is he part of the conspiracy?

    ChacoKevy, My sense is that most market monetarists are on the libertarian end of the conservative spectrum, but I don’t believe all of them are. You’d have to ask, but people like David Glasner don’t strike me as particularly conservative. I consider myself a right wing liberal, but liberals usually view me as a conservative, so I play along.

    Libertaer, Interesting, I’d add that the Germans are wrong if they think the low real rates are caused by easy money.

    Thanks Dave.

  32. Gravatar of ssumner ssumner
    7. June 2013 at 17:11

    Steve, Yes, that’s the sort of thing that got me into blogging.

  33. Gravatar of Edward Edward
    7. June 2013 at 17:52

    Geoff,
    Scott isn’t my master. If you noticed in another post I asked him some troubling questions

  34. Gravatar of TravisV TravisV
    7. June 2013 at 18:08

    Here’s video of Greenspan on CNBC this morning. This man was Chairman of the Fed????????

    http://video.cnbc.com/gallery/?play=1&video=3000174183

    http://video.cnbc.com/gallery/?play=1&video=3000174195

  35. Gravatar of TravisV TravisV
    7. June 2013 at 18:19

    Ah, here’s the initial video of Greenspan on CNBC:

    http://video.cnbc.com/gallery/?play=1&video=3000172830

  36. Gravatar of Do or do not, there is no try (Why Krugman is almost as dangerous as Taylor and Feldstein) | Fifth Estate Do or do not, there is no try (Why Krugman is almost as dangerous as Taylor and Feldstein) | Fifth Estate
    7. June 2013 at 18:45

    […] See full story on themoneyillusion.com […]

  37. Gravatar of Saturos Saturos
    7. June 2013 at 19:33

    Scott: “A few points…” *lists fifteen*

  38. Gravatar of Ben J Ben J
    7. June 2013 at 19:43

    Edward,

    Major Freedom/Geoff has a religious view of Rothbard, and a perspective on economics that he admits can’t be falsified.

    He’ll dispute this, claim either that there is no such thing as “falsifiable” meaningfully, which is nonsense, or that his views are falsifiable, but not give an example, or that his a priori approach makes his views immune to falsifiability, or something or rather. The discussion we had on falsifiability is where he really made a fool of himself; after that comment section Sumner just started ignoring him under the Geoff pseudonym, as he was doing when he was Major Freedom.

    It’s sad because he never presents an fully fleshed out perspective (which might be interesting), it’s just “only sane person in the asylum” style takedowns, hence the “insanity” jibe. The rest of a his posts are mostly invective. They don’t address Sumner’s individual points, but just tirelessly remind everyone that Geoff/MF doesn’t accept the premise that we all accept. He could just post “I disagree with the premise that nominal macroeconomic stabilisation is necessary” and never post here again, but it’s important to him that everyone here hears his views every single time, so there you go.

    The very premise of a central bank implies a violation of the NAP that is sacred to that hardline Rothbardian philosophy. So the pure version of the ABCT *must* be true, it *must* be central banking causing booms and bust, otherwise we would need to violate the NAP for macroeconomic stability, which we obviously cannot do. You can see the tension. There is no need for evidence when you know the truth already (don’t let that stop you manipulating other people’s evidence in an attempt to discredit them though – need to use the tools of the empiricist against themselves!)

    I think the fact that there is always a hardline Rothbardian on patrol here is a testament to Sumner’s views – they are a compelling enough as a justification for a central bank, which is a violation of the strict Rothbardian philosophy, so there needs to be a first line of defence.

    It’s his own Sisyphean trial, though. It hasn’t changed any views, and I’m willing to say with relative confidence that it never will. I like it as an example of the power of cognitive dissonance.

  39. Gravatar of Edward Edward
    7. June 2013 at 20:15

    its worse than that Ben J,

    No matter what evidence you bring, he’ll say “that evidence is constant” with Austrian theory.

    It’s like debating with a hardcore Marxist.

    Ive always been attracted to the NAP, and natural rights philosophy. But Im not an absolutist. I’m not a Kantian lunatic, where its 100% all or nothing.

  40. Gravatar of Edward Edward
    7. June 2013 at 20:15

    “consistent” with Austrian theory

  41. Gravatar of Mike Sax Mike Sax
    7. June 2013 at 20:36

    Yes! I’ve been waiting for this. I have long argued Krugman should engage you more-as you are the only intellectually coherent opposition to Krugman’s theory.

    http://diaryofarepublicanhater.blogspot.com/2013_05_01_archive.html

    Lately he has done a few posts which referred to Market Monetarism-I think you are right this time to think that when he’s talking about MM he is indeed talking about you.

    The minute I saw his post today I was jazzed-I knew you’d have a response.

    http://diaryofarepublicanhater.blogspot.com/2013/06/krugman-to-market-monetarists-whose.html

  42. Gravatar of “Everything reminds Paul Krugman of the GOP. Everything reminds me of sex, but I try to keep it out of my papers.” | The Market Monetarist “Everything reminds Paul Krugman of the GOP. Everything reminds me of sex, but I try to keep it out of my papers.” | The Market Monetarist
    7. June 2013 at 20:44

    […] Scott also comments on Krugman as do […]

  43. Gravatar of Steve Steve
    7. June 2013 at 20:57

    “I have long argued Krugman should engage you more-as you are the only intellectually coherent opposition to Krugman’s theory.”

    Mike Sax,

    I would argue that market monetarism is the only intellectually coherent view on either side.

  44. Gravatar of dtoh dtoh
    7. June 2013 at 21:28

    You’re giving Krugman more credit than due. He’s simply a small (literally) mean spirited hypocrite who’s sacrificed his intellectual integrity to justify a policy of fiscal stimulus and big government because he wishes for higher taxes to confiscate wealth from productive members of society towards whom he suffers a pathological inferiority complex which manifests itself in obsessive spite and envy.

    That said, if you better explained the transmission mechanism for monetary policy you could more easily and irrefutably rebut his arguments (and Cochrane’s too).

  45. Gravatar of dtoh dtoh
    7. June 2013 at 21:34

    Don Geddis,

    Very succinct and excellent comments!

  46. Gravatar of Paul Paul
    7. June 2013 at 22:26

    1.Krugman is not influential.

    2.Even Scott Adams understands this: http://www.dilbert.com/2013-06-03/

    3.What Janet Yellen or Larry Summers thinks about monetary policy is likely to matter a lot more than what PK thinks.

  47. Gravatar of Benjamin Cole Benjamin Cole
    7. June 2013 at 22:32

    Excellent blogging—but a quibble!

    “There is no one on the right, who also opposes monetary stimulus right now, who is anywhere near as influential and persuasive as Krugman.” — Scott Sumner.

    Actually, Krugman more or less says “go ahead with QE, how can it hurt?”

    In contrast, and in phalanx, John Taylor, Allan Meltzer, Martin Feldstein, Fredric Mishkin, and more whose names escape me have exuberantly brayed against more QE (or NGDP targeting)—despite the fact they all supported QE in Japan, with nearly precisely the same arguments we MM’ers use now in the USA.

    The Wall Street Journal has provided a permanent platform for anybody who wants to sing auriferous salutes, or pompously pettifog against the perils of printing money, especially in the form of QE.

    I am not so sure Krugman has so much influence, or that right-wing economists and the WSJ have less than Krugman. With whom?

    It is a sad state of affairs, however, when for a rare moment left- and right-wing economists agree: QE is dangerous, doesn’t work, cannot cause inflation but it might cause hyperinflation and will leave the Fed “saddled” with trillions of dollars of bonds.

    You can’t get these guys to agree on anything except the Market Monetarism is a dangerous dud.

    Oh, great.

    There are times to remind yourself that if you go to certain movie review pages, you can find more than 100 “one-star” reviews of Citizen Kane.

  48. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. June 2013 at 22:46

    Marcus: PK has a point in that quantity monetarism does not work. But we have known that since Goodhart’s Law. But Friedman’s expectations critique of the Phillips Curve (a quantity lever) does work. Therefore …

    I found it striking, reading Friedman’s famous AEA address after encountering Market Monetarism, how Friedman stops his expectations analysis prematurely, relying on the empirical stability of monetary velocity while showing the expectations difficulty for the empirical stability of the unemployment inflation trade-off.
    http://skepticlawyer.com.au/2013/04/15/check-your-expectations-3-milton-friedman-not-going-far-enough/

    So, PK is right in that Friedman’s specific policy solution was wrong, but PK is wrong, Friedman’s general point about what monetary policy could do was correct.

  49. Gravatar of libertaer libertaer
    8. June 2013 at 02:46

    “I consider myself a right wing liberal, but liberals usually view me as a conservative, so I play along.”

    By the way, here in Germany nobody would mistake you for a conservative. If “right-wing liberal” had to be translated into “European English” it would become “liberal left-winger”. In Germany we say “Linksliberaler”.

    Even in the US, if I get it right, many conservatives call a “right-wing liberal” a “libertarian progressive” or even worse a “libertarian cultural Marxist”. And since for the hard money crowd a libertarian who advocates “easy money” is in reality a communist, you are a “communist cultural Marxist”.
    :-)

  50. Gravatar of Ben J Ben J
    8. June 2013 at 04:02

    Edward,

    Yeah that is a classic,

    “I don’t need evidence to come my views.”

    “All evidence shows your theory is wrong.”

    Powerful cognitive dissonance.

  51. Gravatar of Browsing Catharsis – 06.08.13 | Increasing Marginal Utility Browsing Catharsis – 06.08.13 | Increasing Marginal Utility
    8. June 2013 at 04:03

    […] -Scott Sumner, “Do or do not, there is no try (Why Krugman is almost as dangerous as Taylor and Feldstein).” […]

  52. Gravatar of Michael Michael
    8. June 2013 at 04:06

    “1. The crisis hurt the rich, even today they are worse off than in 2000.

    2. If you put 10 random academic economists into the Fed, they would have done roughly the same (if not tighter), even if they were not trying to help the rich. I meet very few academic economists who see their life’s mission as being to make life more comfortable for the rich at the expense of high unemployment. Sorry, but your theory is not plausible.”

    1. The crisis hurt “the rich”, certainly. But it hurt “the non-rich” even more. The pie is smaller, but “the rich” may have a larger share of it. There are plenty of cases where large companies support regulatory policies that seem to be against their interests – because they think they will be hurt by such policies, but smaller competitors would be hurt even more. Wal-Mart, for example, has supported increases in the minimum wage. Probably because Wal-Mart thinks they would find it easier to bear the cost of a higher minimum wage than smaller competitors, so what they lose in paying a higher wage they gain in market share. Or, consider the huge burden in time and money to get a new drug approved by FDA – this hurts big pharma in an absolute sense (it costs more to get a drug approved and the chances of failure are greater), but it also means that smaller pharma and biotech companies can generally not afford to bring a new drug all the way to market on their own, so they are forced to sell out or partner with companies that can (big pharma). The overall pie of (new drug approvals) is smaller than it might otherwise be, but big pharma’s share of that pie is larger than it would otherwise be. In the same way, a weaker economic growth may be better for big established companies than for their smaller competitors.

    2. If you put 10 random academic economists on the Fed, how would political pressures affect their actions? Bernanke Fed Chair behaved differently than one might have expected based on Bernanke’s academic track record. During the early stages of the crisis, Mankiw – who was probably a candidate for Bernanke’s job – advocated higher inflation, but if he actually had the job would he have targeted higher inflation? Maybe, but we believed Bernanke would have done the same. Then there’s the issue of… in some respects we have a bigger federal government today, so big government types may be happier with weaker growth that allows more federal intervention in the economy.

  53. Gravatar of Max Max
    8. June 2013 at 04:57

    Scott, “1. The crisis hurt the rich, even today they are worse off than in 2000.”

    Eh…real dividends on the S&P 500 are 40% higher now than in 2000.

  54. Gravatar of Vivian Darkbloom Vivian Darkbloom
    8. June 2013 at 05:21

    Here’s a story that supports the thesis that Krugman is *much more* dangerous than Feldstein or Taylor (to the truth, that is):

    http://gregmankiw.blogspot.fr/2013/06/landsburg-versus-krugman.html

    Which kind of reminded me of this exchange with a fellow commenter on the relative value of historical data versus projected data for the same or similar time period:

    http://www.themoneyillusion.com/?p=21168#comment-247871

  55. Gravatar of Mike Sax Mike Sax
    8. June 2013 at 05:34

    Paul you’re simply wrong. Do you think that Yellen or Summers are unaware of what Krugman thinks and aren’t influenced by it? Summers and Krugman actually go way back. If you think the White House doesn’t read Krugman daily-and frequently speak with him on policy issues, you’re mistaken.

    Actually back in 2011 before Obama unveiled his jobs bill-which the GOP killed even the parts they had previously said they’d support-they gave it to Krugman to look at first. Even in 2008 during Obama’s transition Krugman was consulted a lot.

    Even Bernanke responded publicly when Krugman wrote that big piece asking him to consider a 3% inflation target. Actually Krugman and BErnanke go way back-to Princeton days.

    Some people have such deep Krugman Derangment Syndrome (KDS) they can’t do any justice to him whatever. You may like or not like his influence but he has it. To claim otherwise is just spiteful-and wrong.

    It’s like I don’t agree with Scott on everything but I have no doubt of his influence.

  56. Gravatar of Frank Frank
    8. June 2013 at 05:37

    You don’t need to convert academic economists to the merits of QE, you need to influence institutional investors and wall street economists like Bill Gross and the “shadow open market committee guys”. I speak to investment managers and pension fund advisors all the time, and they hate QE. It makes their job harder and makes feel less important. So get you and your Market Monetarist allies on Bloomberg Radio and CNBC TV and argue with Bill Gross, not Krugman (who has no influence in the investment community).

  57. Gravatar of J J
    8. June 2013 at 05:42

    Professor Sumner,

    You said: “Bob, You said;

    “An recall, that Bernanke recommended that congress do more stimulus. I find it hard to believe that he would have offset stimulus that he himself requested.”

    I just wrote a paper on this, and it should come out fairly soon. He also says things that imply he would offset it, such as the Evans Rule. So it’s a question of which of his statements of his you believe.”

    I think it doesn’t even matter if you believe his statement requesting more fiscal stimulus. Bernanke wants fiscal policy to take the pressure off him because he doesn’t want to do his job when it requires unconventional monetary policy measures. That doesn’t mean that he won’t offset a lack of fiscal policy or that he thinks offset is not possible.

  58. Gravatar of ssumner ssumner
    8. June 2013 at 06:23

    Saturos, Just for that next time I’ll do 20.

    Lorenzo, Even Milton Friedman was moving away from the quantity approach in the later part of his life (adopting inflation targeting.)

    Max, I said the rich are worse off, not that real dividends have fallen. Real stock prices are lower. So is real estate. Interest on bonds is lower.

    J, Yes, I’ve made that argument as well.

  59. Gravatar of ssumner ssumner
    8. June 2013 at 06:33

    Paul, He’s quite influential on the left.

    libertaer, That’s fine, whatever people want to call me. Marxist, racist, fascist, communist, etc. Doesn’t matter to me.

    Michael, I think the rich are evil, but not so evil that they would want to screw the poor even if it cost them income.

    You said;

    “If you put 10 random academic economists on the Fed, how would political pressures affect their actions?”

    That supports my point. When not pressured (in academia) they support the same sort of policies as the highly pressured Bernanke.

    Frank, I think the academic community has more influence on the Fed than the investment community. QE and the Evan’s Rule are academic ideas, not investment community ideas.

  60. Gravatar of Marcos Marcos
    8. June 2013 at 06:40

    Milton Friedman in the 90s said that the when interest rates are ultra-low the monetary policy was to tight so he was for the quantity appraach or he was on the side to do whatever it takes?

  61. Gravatar of Mike Sax Mike Sax
    8. June 2013 at 06:40

    Sumner answers Krugman http://diaryofarepublicanhater.blogspot.com/2013/06/now-were-talking-sumner-vs-krugman.html

  62. Gravatar of Bogwood Bogwood
    8. June 2013 at 06:58

    If half of GDP is toxic, do you just hold your nose and target its growth anyway. Going line by line it would be easy to argue”half toxic” but that isn’t the point. Funding any particular level of GDP removes the natural feedback mechanisms and enables the toxicity,whatever the level.

  63. Gravatar of Max Max
    8. June 2013 at 07:22

    “Max, I said the rich are worse off, not that real dividends have fallen. Real stock prices are lower. So is real estate. Interest on bonds is lower.”

    The rich as a class can’t benefit from higher asset prices, or be hurt by falling asset prices. They can only benefit from higher income, or be hurt by falling income.

    Yes, interest on bonds is lower, but overall capital income is up. Stock income is way up, real estate income is way up.

  64. Gravatar of Iván Iván
    8. June 2013 at 09:14

    Thanks Scott and Don

    @Don Geddis, how is monetary policy free? Didn’t monetarism’s father Milton Friedman said there was no free lunch?

    Fiscal policy picks winners, but also monetary policy or are we assuming a “money helicopter”?

    @ssumner how is fiscal stimulus inflationary? If I build a road but tax paul to do it, then AD does not increase and thus there’s no inflation…

  65. Gravatar of Bob Bob
    8. June 2013 at 09:20

    Don,
    “Having the economics community more quickly embrace Market Monetarism would also have averted a lot of suffering. Why are you so excited about a band-aid, instead of putting all efforts towards fixing the problem for real? Especially since the solution is already known?”
    I think I was clear that I would prefer MM, but 4 years and running, it still hasn’t happened, so I don’t see your point. As for the band aid, band aids stop bleeding, and there has been a lot of bleeding.
    SS,
    I didn’t know that Bernanke issued conflicting statements. That is disappointing. I took PK’s post as an olive branch. If that’s what it was, you shouldn’t expect another one. And 2009? If your child said he/she tried in 2009 as an excuse for not doing something, what would you say? That said, PK is nasty and probably deserves more blame than you. I still think the two of you could do some good if you managed to find some consensus. Thanks for replying. Very cool.

  66. Gravatar of Michael Michael
    8. June 2013 at 11:23

    “Michael, I think the rich are evil, but not so evil that they would want to screw the poor even if it cost them income.”

    We have a lot of policies that make some people/corporations better off at the expense of others. (It’s not just rich vs. poor). Did you catch the Boston Globe spotlight series on the taxi industry in Boston? A Boston cab medallion is worth about $700K and has appreciated more than the S&P 500 over the past decade (not that that is saying a whole lot, but still…). And the only people who are made better off by those medallions are the people who own them. Cabdrivers aren’t better off, people who ride in cabs aren’t better off, innovators (Uber) who could provide better service. If medallions were abolished tomorrow, the gains of everyone besides medallion owners would outweigh the losses of the medallion owners.

    Most everyone loses from tight money, but some lose more than others. So on a relative level, some come out ahead on the deal. For example, under NGDPLT, there would be considerably less economy-wide damage from letting an AIG or a GM go under, wouldn’t there?

    All the same, I hope that you are correct and that we are simply dealing with catastrophic mistake that will eventually be fixed.

  67. Gravatar of Robert Robert
    8. June 2013 at 13:15

    @Ivan Milton Friedman quote “there’s no such thing as a free lunch” he means was fiscal-policy/deficit-spending the had nothing to do with monetary policy.

  68. Gravatar of Negation of Ideology Negation of Ideology
    8. June 2013 at 17:09

    First, I think we should acknowledge that Krugman is right on one point – most of the opposition to QE is coming from the right, and it’s not only from the clowns like Paul, Beck and Perry.

    But he admits that the left is skeptical that monetary policy can offset fiscal policy, and that is a major disagreement. He correctly notes that most market monetarists are on the right, for now, but he doesn’t see that it need not always be so. He forgets that Keynesianism was used to justify W’s tax cuts, and it has been used to justify military spending. There is no reason why we should think Keynesianism benefits the left and market monetarism benefits the right.

    The problem a lot of us have is that is seems that many on the left are using the shortfall in AD as an excuse to push for more government spending on the programs that they would want to increase in any case. I’m not accusing anyone of intentional dishonesty, it’s that people are great self-kidders.

    I think everyone, right, left or center, would be better off if we declared a truce. Seperate the question of how much AD we need from either the level or the composition of government spending. Whatever amount of NGDP we need to hit, do it with monetary policy. Then, if someone wants to increase basic scientific research, they argue for it on a cost benefit basis. And if someone believes income or wealth distribution is unfair, they argue for redistribution. But we should stop the counterproductive practice of saying we need to cut taxes or build a military base to “put money into people’s pocket so they’ll spend it.”, and recognize that as the broken windows fallacy.

  69. Gravatar of MikeF MikeF
    8. June 2013 at 17:29

    The difference is that for Krugman…..Economics is not just for Economics sake…it is a tool to use to justify his political views…He will never give up the fight for more progressive taxation and a greater role for government in the economy. I suspect that he knows that you are right….but by admitting it he gives up much of ammunition.

    Our country owes you a debt of gratitude…keep up the good work….

  70. Gravatar of Michael Michael
    8. June 2013 at 18:10

    Negation,

    That makes a lot of sense. Government spending should be justified based on what we get in exchange for that money, not as stimulus. Just as we shouldn’t act as if private companies exist to produce “jobs” rather than a product.

  71. Gravatar of Michael Michael
    8. June 2013 at 18:17

    Debating whether monetary policy is a “free lunch” is asking the wrong question.

    Having too little money (or too much money) will interfere with transactions in the real economy, since money is a part of (almost) every transaction.

  72. Gravatar of Sumner och Krugman | Rättvist och balanserat Sumner och Krugman | Rättvist och balanserat
    9. June 2013 at 02:39

    […] Do or do not, there is no try (Why Krugman is almost as dangerous as Taylor and Feldstein) […]

  73. Gravatar of ssumner ssumner
    9. June 2013 at 05:59

    Marcos, He was moving toward the “whatever it takes” approach late in life.

    Bogwood. You use monetary policy to control NGDP, and regulatory policy to control toxicity.

    Max, Income is an almost worthless measure of well-being. And I don’t agree with your numbers, the data I’ve seen suggests the share of income going to the top 1% is lower than in 2000.

    Ivan, If AD doesn’t increase, then the fiscal stimulus didn’t work. So I fail to see your point.

    Michael, The taxi example supports my point, the special interest group is made better off.

    Negation, You said;

    “There is no reason why we should think Keynesianism benefits the left and market monetarism benefits the right.”

    This is a good point, and many are confused on this issue. Keynesian economics does not imply “big government” although I recall Krugman implied it did. Macro stabilization and size of government ideology are completely separate issues. There are lots of conservative Keynesians, as you note.

    Thanks MikeF.

  74. Gravatar of TallDave TallDave
    9. June 2013 at 08:29

    Benjamin Cole — Yep, that drives me crazy, too.

    It’s like we’re pinned down by a machine gun nest, and everyone keeps saying “grenades are too dangerous, we need to send another bayonet charge at them!”

  75. Gravatar of Max Max
    9. June 2013 at 11:50

    Scott, after looking at the Fed data, I retract the statement that capital income is up since 2000 – due entirely to the fall in interest rates since 2008, it probably isn’t.

  76. Gravatar of dtoh dtoh
    9. June 2013 at 14:09

    Negation,
    You said;
    “The problem a lot of us have is that is seems that many on the left are using the shortfall in AD as an excuse to push for more government spending on the programs that they would want to increase in any case. I’m not accusing anyone of intentional dishonesty, it’s that people are great self-kidders.”

    Well put, but you let people off the hook with the “self-kidders” moniker. They are lying to others and they are lying to themselves.

  77. Gravatar of Michael Michael
    9. June 2013 at 18:14

    “Michael, The taxi example supports my point, the special interest group is made better off.”

    Yes, that’s true. I guess my point is that I’m not convinced there isn’t an interest group/groups who benefit from the current environment. Even if the “benefit” is just being hurt less than everyone else.

    Part of it is my disbelief that policy-makers and economists who want nothing more than a return to the “Great Moderation” would not have come closer to NGDPLT by now. Part of it is noting that Bernanke, Fed Chair seems to have acted so very differently than one might have expected of Professor Bernanke. Romer and Woodford, very influential academics, have endorsed NGDP targeting… but instead we have continued tight money.

    If this was just a disastrous error, I would hope to see more evidence of people learning from it.

  78. Gravatar of John John
    9. June 2013 at 22:51

    Michael,

    Banks and financial institutions benefit greatly from the current environment. Besides the fact that the sector would have been eviscerated by the crisis in 2008-2009 absent the action taken by the government and central bank, the Fed’s policy of paying banks interest on reserves makes no sense for the broader economy. The interest on reserves policy only makes sense if you remember that the Federal Reserve’s first interest is to look after the needs of the banking system. That is precisely the reason people like JP Morgan and other prominent bankers advocated the creation of the Fed 100 years ago.

    In addition to being able to passively repair their balance sheet by getting paid to hold money-money the Fed created for the express purpose of providing them with liquidity-the steep yield curve allows banks to profit by borrowing short and lending long.

    The financial sector has benefitted tremendously from the current environment relative to what would have happened in a free market. Instead of shrinking, finance has continued to grow as a percentage of GDP following the worst banking crisis since the Great Depression.

  79. Gravatar of J.V. Dubois J.V. Dubois
    10. June 2013 at 01:23

    “Actually, before I get there, a word about self-styled conservative “market monetarists”

    Maybe I read too much into it but this sentence makes me so sad on different levels. One has to read this article by Krugman as it is – a vicious lash at an idea that seem to threaten him most. I will give him that it is a deftly worded and subtle attack, but it makes it no less effective. He achieves several things by this, most importantly:

    1) He wants to make MM less influential by putting it into a “conservative” box. Now I suppose that not many hard-line Krugman supporters will have anything good to say about traitorous market monetarists who were turned to the conservative dark side.

    That Krugman attacked Scott Sumner personally is beyond doubt. I suppose Mr. Krugman would have much harder time writing this as a response to one of many articles supportive of NGDPLT by Matt Yglesias, or to Woodford paper for that matter.

    2) He does not respond to MM proposals in any substantive manner

    3) And most importantly, by being stubborn and by making this attack it is him who betrays his readers. He makes them ignorant of results of a very important debate which makes his readers vulnerable to ridicule of any competent opponent. And this also does not bode well for any other message he may want to spread through his fans and followers in the future.

  80. Gravatar of Michael Michael
    10. June 2013 at 02:48

    John wrote:

    “Banks and financial institutions benefit greatly from the current environment. Besides the fact that the sector would have been eviscerated by the crisis in 2008-2009 absent the action taken by the government and central bank, the Fed’s policy of paying banks interest on reserves makes no sense for the broader economy. ”

    John, I agree that the financial sector is one candidate to prefer the current environment. Add the value of implied bailouts to for “systemtically important” institutions.

    Another one to consider is rising corporate profits. Corporations would seem to benefit from some aspects of the current crisis: low inflation (in context of slow but positive NGDP growth), weak labor market,

    And another is expanded scope of the federal government. More need for arbitrary intervention in the economy, greater dependency of the average person on government having seen their financial security erode, etc.

    I can buy that what happened in 2008 was a central bank error; it’s just harder to accept that that error hasn’t been fixed yet.

  81. Gravatar of Michael Michael
    10. June 2013 at 02:58

    And I will add one more – any interest group that thinks it can use the crisis to further its own political agenda (i.e. the “now more than ever” crowd/crowds). This could be a right wing crowd or a left wing crowd, or both (each udner the assumption that continued weakness will ultimately allow their own agenda to be enacted) .

  82. Gravatar of J Mann J Mann
    10. June 2013 at 05:13

    That 2008 post is about as clear as Krugman ever is.

    He either thinks that the Fed can’t create inflation (which is what he was saying there) or that it probably can’t. (Which seems to be what he’s saying now). Up to now, I was never sure if he was saying that it can’t or just that it won’t.

    I guess that’s obvious, since he’s been talking about zero lower bound all these years, but it took me until now to sort of see what Krugman’s actual difference in premise was from Sumner.

  83. Gravatar of ssumner ssumner
    10. June 2013 at 06:59

    Thanks Max.

    Michael, Central banks are very inertial–they learn very slowly. In some ways that’s good, but unfortunately they are slow to recover when they make big mistakes. Some would argue the Fed has nudged a bit in my direction.

    JV, I agree that he does a disservice to his readers by making the other side look worse than it is.

  84. Gravatar of Michael Michael
    10. June 2013 at 07:40

    I agree the Fed has moved in your direction. How big a move depends on perspective – to me it looks like a (very) small step, to the Fed it was probably a leap. Still surprised (and dismayed) that we haven’t seen more movement.

  85. Gravatar of Krugman and the ‘austerians: A tiresome and misguided ‘debate’ | Historinhas Krugman and the ‘austerians: A tiresome and misguided ‘debate’ | Historinhas
    10. June 2013 at 14:25

    […] a recent post Scott Sumner replied to Krugman´s take on market monetarists. Scott had something like 15 points […]

  86. Gravatar of Krugman versus the austerians: A tiresome, misguided ‘debate’ The Corner Krugman versus the austerians: A tiresome, misguided ‘debate’ The Corner
    11. June 2013 at 17:57

    […] a recent post, Scott Sumner replied to Paul Krugman’s take on market monetarists. Scott had something […]

  87. Gravatar of Cory Cory
    12. June 2013 at 09:03

    Don Geddis,

    You said this:

    “That should never be an excuse for spending tax money. There is no role for the fiscal authority, in managing aggregate demand. AD is completely controlled by the central bank.”

    Is it not true that even Scott has acknowledged that the fiscal authority could have a role in raising AD in the event that the “Central Bank is incompetent”?

    If that is true, it seems to me that it presumes a scenario wherein the central bank might stand back and allow the fiscal authority to raise AD if the public want it to be done that way.

    I suppose what I’m saying is that I think really your statement is a normative position, rather than a positive one, is it not?

    I also have another question.

    Suppose that rather than the FED itself acquiring assets in exchange for bank reserves…even the whole world if necessary…citizens each had their own master accounts at the FED and instead of purchasing assets from the public like T-Bills the FED just credited master accounts until the desired NGDP target was achieved…would you consider such a policy within the realm of Market Monetarism??

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