Tyler Cowen recently had the following to say about QE:

I’m unhappy with claims that “we’re not doing enough” and that therefore this is no test of the idea of monetary stimulus.  This is what QEII looks like, filtered through the American system of political checks and balances.  And if it looks small, compared to the size of our problems, well, monetary policy almost always looks small compared to its potential effects.  I’m willing to consider this a dispositive test and I am very curious to see the results.

Of course I am one of those claiming that we aren’t doing enough, but I’d like to focus on Tyler’s curiosity about the results.  I think there are more layers to this question that most people assume—many more.

Let’s start with the distinction between real and nominal GDP.  What would count as success?  Should we focus on real GDP, nominal GDP, or both?  That depends.  I think most economists would say that the whole point is to raise RGDP, and that a rise in NGDP that was not accompanied by an increase in RGDP would constitute failure.  But what happens if both RGDP and NGDP rise at rather modest rates, (which is quite likely.)  In that case, would monetary stimulus have been shown not to work?  Tyler Cowen has argued that much of the recession is real, and he has also expressed skepticism about “liquidity trap” models that say monetary policymakers cannot create inflation (or higher NGDP) at the zero rate bound.  So perhaps Tyler is interested in whether a given increase in NGDP translates into higher RGDP.

For instance, let’s assume NGDP grows at 3%, RGDP at 2% and prices at 1%.  I’d say monetary stimulus hasn’t really been tried.  On the other hand if we had 6% NGDP growth accompanied by only 2% RGDP growth I’d say monetary stimulus had been tried, and failed to produce the predicted growth in RGDP.  Does that mean it never should have been tried?  Not necessarily, it depends on the Fed’s policy goals.  I favor 5% NGDP targeting, level targeting, regardless of what is happening on the supply side of the economy.

On the other hand, as I read Tyler’s comment above, he’s setting the bar where 3% NGDP growth would constitute failure.  Even if monetary stimulus, pursued a outrance, would certainly boost inflation and NGDP, he suggests that the recent QE announcement is about all that is politically feasible in the US.  This is an argument that Krugman has made as well, and at some level I think he’s right.  But that sort of failure would not change my message, because whereas Tyler views QE2 as a partially endogenous response from real world monetary policymakers, I consider TheMoneyIllusion.com to be a sort of exogenous shock, aimed at convincing policymakers that monetary stimulus that seems highly aggressive is actually quite modest.  I’m trying to make more expansionary policies become more politically acceptable.  Yes, that’s a rather grandiose objective, and I don’t realistically think I can have more than a tiny impact on the zeitgeist, but (as I argued earlier) even a tiny impact is important when the stakes are high.

We’ve considered the distinction between real and nominal GDP, and the distinction between what’s politically feasible and what is not.  And yet we’ve haven’t really addressed the most important implications of Tyler’s curiosity.  For instance, what would be the policy implications of failure?  If NGDP rises fast, but unemployment stays high, then maybe we shouldn’t be trying to boost AD at all.  If NGDP doesn’t rise, then maybe we should have tried fiscal policy.  Or maybe not.  It’s clear to me (from market reactions) that QE2 has already raised the expected rate of NGDP growth.  I also think QE1 slightly boosted AD in 2009.  Those who claim that fiscal stimulus should have been $1.3 trillion would have to show that the Fed would not have simply offset the effect of more fiscal stimulus by doing less monetary stimulus.  Perhaps QE1 and QE2 never would have happened.  After all, the Fed’s two forays into QE both seemed motivated by a macroeconomy that was under-performing in the months immediately preceding the policy initiatives.

Most importantly, I would argue that Tyler Cowen has no reason to be curious.  We already know whether QE2 will work, we know the only effects that matter—the impact on NGDP growth expectations.  OK, that’s slightly overstating things; we know it boosted 5 year inflation expectations by about 0.5%.  Again, this shows the urgent need for a NGDP futures market.  For the moment, let’s assume an NGDP futures market did exist–my hunch is that Tyler Cowen might still have been “curious” to see the effect of QE.  Obviously I think that would be a mistake, and the only thing we will learn from observing the macroeconomy over the next 5 years is that part of NGDP growth that was not caused by QE.

Think of the TIPS market response as not just the optimal forecast of the effect of QE, but also the optimal estimate of the effect of QE.  And not just the optimal ex ante estimate, but the optimal ex post estimate.  How can that be?  Surely we will eventually know much more about how much inflation was created than our current rather crude forecasts?  Actually no.  We still don’t know how much good Obama’s $800 billion fiscal stimulus did, because we don’t know the relevant counterfactual growth path.

Economics is all about the effect of X on Y, ceteris paribus.  The TIPS market gives us the optimal forecast of inflation, ceteris paribus.  The actual inflation rate that we observe over the next 5 years will differ from that forecast, but we have no way of knowing whether it differs because “other things weren’t equal” or because our original forecast was flawed.  Without such knowledge, we have no reason to revise our estimate of how much QE2 raised 5 year inflation expectations.  There’s no need to be curious Tyler; we know how much good QE2 did, about 0.5%/year more inflation over 5 years.  Yes, we don’t know how much that will raise RGDP growth, but only because of the bizarre anomaly that the US government has never bothered to create an NGDP future market.  Now are you guys seeing why I think this market is so important?  If we had one, the market response (TIPS vs. NGDP futures) over the past 2 months would have basically settled the dispute between Tyler and myself about whether the recession is mostly nominal or mostly real.

I seem to recall Robin Hanson complaining that we won’t spend the money needed to redo the Rand health insurance experiment—the only one that really solves the identification problem.  This is even worse, we are making enormous macroeconomic policy errors because we won’t create and subsidize trading in a simple NGDP futures market.

Update:  Here is the Hanson post.  Second update:  Oops, TGGP pointed out it should be this link:

Let’s go one year forward and consider how my reputation will fare under different outcomes:

1.  NGDP grows at only about 3-4%, and RGDP grows by only about 2%.  I think QE2 will be seen as not working, and my reputation will suffer.

2.  NGDP grows about 5%, and RGDP grows a bit over 3%.  I think I’ll do alright.  I said it was better than nothing and would slightly boost growth.

3.  NGDP grows 7% and RGDP grows at 4-5%.  I think people will see the result as strongly vindicating my policy proposals.

4.  NGDP grows 7% and RGDP grows only 3%.  I think people will think I was right about the potency of monetary policy, but wrong in assuming the recession was an AD problem.  Tyler Cowen wins twice. Krugman loses twice.  Kling wins on structural problems, but loses on the potency of QE.

But that’s not how I see things.  I hope outcome #3 occurs, but I also think the credit that I predict I’d receive would be undeserved.  I’m a “target the forecast” guy.  The markets are saying QE2 helped, but nothing too dramatic.  Outcome #3 would be more than I think the markets are forecasting, and hence would not be evidence in support of forecast targeting.  My sense is that other people don’t particularly focus on the forecast targeting part of my message, however, and that they’d see it as vindicating my constant arguments for monetary stimulus.  What do you think?

I bet you never realized there was so much complexity embedded in Tyler Cowen’s innocuous sounding comment “I am very curious to see the results.”  I’m very curious to see how Tyler interprets the results that actually occur, but I have no curiosity at all about the nominal effects of QE2.  The markets have already answered that question to my satisfaction, ceteris paribus.  But I am curious to see the NGDP/RGDP split, if NGDP rises dramatically.

Here’s Tyler Cowen:

No one — and I mean no one — has a coherent story about how nominal stickiness of wages lies at the heart of our current dilemma.

Good news:  I’m now a celebrity with an instantly recognizable face.

Bad news:  About that face . . . maybe a Bernanke/Krugman/Stiglitz beard would give it more gravitas.

Good news:  Yes, I’m incoherent, but the phrase “and I mean” suggests I’m the least incoherent of a bad lot.

Bad news:  He’s right, it is hard to make a sticky wage theory plausible—real wages aren’t particularly countercyclical.

Good news:  But not impossible.  Forget inflation and real wages; the key is NGDP.  If NGDP growth falls faster than wage growth, mass unemployment is almost inevitable.

I’ll do a more serious response to Tyler’s post later today.

My extremely annoying victory lap continues.  David Beckworth recently had this to say about the debate over what Friedman would have thought about QE:

So the debate over what Milton Friedman would say continues to be debated  by policymakers and other monetary luminaries. This debate started with an Op-Ed I coauthored with Will Ruger in the Investor’s Business Daily, received more attention from a similar article by David Wessel in the Wall Street Journal, and was further promoted by Terence Corcoran in the Financial Post.  These articles upset the old school monetarists and apparently were discussed at a recent  Karl Brunner conference where they were gathered.

BTW, I wasn’t the leak.  David’s right that his article touched off the debate, but not the analysis.  Here are four earlier posts I did suggesting Friedman would have favored monetary stimulus:

July 31, 2009

August 2, 2009

August 24, 2010

Sept. 16, 2010

For the past several years I’ve been using this argument to criticize the Fed.  Now Bernanke has made the same argument to defend the Fed:

In an essay in The Wall Street Journal on Thursday, Allan H. Meltzer, an economist at Carnegie Mellon University and the pre-eminent historian of the Fed, said that the Fed was stoking inflation to stimulate the economy, and that Mr. Friedman would never have supported such an effort.

That drew an emotional retort from Ben S. Bernanke, the Fed chairman and a scholar of the Depression.

“I grasp the mantle of Milton Friedman,” Mr. Bernanke told his colleagues on Saturday. “I think we are doing everything Milton Friedman would have us do.”

Mr. Bernanke said Mr. Friedman would have agreed that the Fed had a mandate to promote price stability and that “you don’t want inflation to be too high, but you also don’t want inflation to be too low.”

Because inflation, at just more than 1 percent, is too low, and because the economy and the money supply are growing very slowly, “even from a strict monetarist perspective, we need to do more,” Mr. Bernanke said.

Of course I can’t be sure that Friedman would favor monetary stimulus.  But there is one thing I am confident of; he would not have opposed monetary stimulus in late 2008 and 2009, and supported it in 2010.  He was a very logical thinker, and the case for monetary stimulus was clearly much stronger when prices and NGDP were falling in late 2008, than it is today.  And Bernanke thinks we need more stimulus right now.

In 2009 I was using Friedman’s quotations to show why the Fed needed to ease.  In 2009 those posts were used to bash the Fed.  Now those same posts are seen as supporting the Fed.  And I haven’t moved one bit.  So what’s changed?

PS.  The term ‘victory lap’ was ill-chosen; we are a long way from having adequate NGDP growth expectations.

Paul Krugman frequently notes that he has been consistently right in claiming that our fiscal and monetary policies would not lead to high inflation and high interest rates.  I can’t say I blame him (which is not surprising, given that I have made identical predictions.)  At the same time, I feel a bit uneasy about judging the merits of an economic theory based on the forecasting skill of its leading proponents.  I believe markets are relatively efficient, and thus that it is hard for even a brilliant economist to forecast shocks that the markets don’t see.  I am far more impressed by the fact that Irving Fisher’s Phillips curve model explains the Great Contraction of 1929-33, then I am worried by the fact that he failed to predict it before it happened.  But I’m the exception.

I was reminded of this issue when I read a great post by Ryan Avent entitled “What Happened over the Summer?”  Ryan dismisses several theories of the economic slowdown, before settling on the following explanation:

So let me tell you a story. In late April, fears of a serious European debt crisis began to emerge. These fears sparked a mild panic and a renewal in the flight to safety. This flight manifested itself, in part, as a rush to buy American government debt. Treasury yields had been rising in the months prior to the crisis, but plunged from April through the summer. The dollar shot up; the trade-weighted dollar rose nearly 5% from late April to early June. In response to the pressure within markets, the Fed reopened currency swap lines it had used in previous stages of the crisis. It did not, however, take steps to offset the impact of the financial hiccup on growth expectations.

Markets reacted. The Dow fell over 13% from late April to early July, and was still 10% off its April peak in late August. From January to April, 10-year inflation expectations were stable at around 2%. These began falling sharply, and were down to around 1.5% by the end of the summer. Every signal available began flashing a decline in economic expectations starting in late April. But the Fed didn’t act. Not until late August did Ben Bernanke hint at a course change, and matters improved almost immediately. The Dow has risen by nearly 13% since then. Inflation expectations leveled off in October. And the pace of private hiring has returned to early spring levels.

You may not buy this story. We obviously can’t be sure one way or another. It strikes me as fairly compelling, however. And if we do accept it, the story implies that the Fed, by waiting until August to signal a policy change, cost the economy between 100,000 and 200,000 jobs a month for four months.

Of course people could argue that “hindsight is 20-20” and that the Fed had no way of knowing last spring that the euro crisis would end up hurting the US more than Germany.  Unless, of course, they read TheMoneyIllusion.  The following essay was published by the online Economist in August, but note the embedded quotation that was published in my blog back in May:

Back in May and June there was a lot of talk about the bleak outlook for the euro zone. Recall that the problems in Greece, and more broadly all the so-called “PIIGS”, had created doubts about the soundness of banks in France, Germany, and the Netherlands. In late May I made this observation in my blog:

“So stocks in the heart of the eurozone, the area with many banks that are highly exposed to Greek and Spanish debts, are actually down a bit less (on average) than the US. Perhaps the strong dollar is part of the reason. Perhaps monetary policy has become tighter in the US than Europe.”

The loss of confidence in the euro led to a rush for safety, and the demand for dollars rose sharply in the spring of the year. Because the interest rate in America is stuck at 0.25%, and the Fed is reluctant to use unconventional policy tools, there was no policy action taken to offset the increase in the demand for dollars. Monetary policy became effectively tighter.

The results were predictable. Whereas the euro had traded in the range of 1.35 to 1.45 to the dollar in the first four months of 2010, the exchange rate has dropped to the 1.20 to 1.32 range since the beginning of May. Because Germany has an export-based economy, this contributed to a fast rise in output. Just the opposite happened in the US, where a recovery that looked on track in the first quarter of 2010, suddenly stalled in May and June. Some have argued that the winding down of fiscal stimulus caused the recovery to weaken in the US. But spending rose briskly in the second quarter; the problem was a widening of the trade deficit.

Many economists overestimate the importance of real shocks in the business cycle of large diversified economies, and underestimate the importance of monetary shocks.

Let me first clarify one point.  I am not trying to claim to be some sort of Nostradamus.  I simply try to infer market expectations from indicators such as stock, forex and TIPS prices.  Some indicators, such as a strong dollar, can be ambiguous.  It might indicate a strong real economy, or it might indicate a tight money policy (including an increase in money demand.)  In those cases I look at other markets for confirmation.  In the long run I’ll predict no better than markets.  Where there are unexpected shocks (like bubbles bursting) I will fail to predict them.  But consider how much I was able to predict, just buy using market indicators:

1.  In late 2008 I warned that all sorts of market indicators were predicting a severe fall in AD, and that trying to fix banking was merely treating the symptom.  I said much easier money was needed.  We now know that NGDP began plunging two months before the banking crisis of September.

2.  In late 2008 and early 2009 I said fiscal stimulus would not even come close to solving the AD problem, and that monetary stimulus was the key.

3.  On the day after the March 2009 QE I said it would provide a slight boost, but was nowhere near enough to solve the problem.  The economy did do a little bit better after March.

4.  Like Krugman, I said the right-wingers predicting high inflation (because of QE and ultra-low rates) were totally off base, and that inflation would stay very low.

5.  In May 2010 I suggested that the euro crisis might well hurt the US more than Europe.  That was before we had any second quarter GDP data showing the sharp slowdown in the US and the robust growth in Germany.  Ryan Avent is right, the Fed had the market signals it needed to act in the spring and cost hundreds of thousands of jobs by waiting until November (or late August for the verbal easing.)

6.  Back in early March 2009 I suggested that the Fed needed to do three things; QE, lower IOR, and level targeting and/or NGDP targeting.  Recently they began discussing all three options, and adopted QE.  The talk of QE and the other options clearly boosted stocks and foreign exchange prices in September-October, which confirmed my prediction that monetary policy is not impotent at the zero bound (as had been widely assumed in late 2008 and early 2009.)

7.  My prediction that the slowdown that began around May was due to an increase in the demand for dollars implied that monetary easing should reverse the slowdown.  It’s too soon to say for sure, but Avent’s right that the early indications are that the economy picked up a bit in October.  Certainly QE has already moved asset prices in a direction that should (ceteris paribus) lead to more NGDP growth.

This does not mean prosperity is just around the corner.  Markets seem to be indicating that inflation will be a little bit higher, and that the odds of a double dip recession have receded.  But the recovery is still likely to be slow, albeit a bit less slow than forecast in mid-August.

I don’t have any spectacular predictions that other missed.  I’m no Roubini.  But at the same time I think it’s fair to say that if monetary policymakers had paid more attention to market signals after mid-2008, we would have had a more expansionary policy.   And even those who are skeptical of the current QE policy can hardly deny that more AD would have been beneficial in late 2008.

Rather than look for spectacular predictions (something we can never expect from policymakers anyway) it makes more sense to look back at what models were telling us, and whether in retrospect the advice now seems wise.  In 1930 no one knew for sure that easier money was needed.  And in 1966-68 no one knew for sure that tighter money was needed.  Now almost everyone agrees about what went wrong in those two episodes.  I’m impressed by models that would have told us that at the time.  I’m claiming that the target the forecast approach that relies on market forecasts of NGDP indicators would have led to better monetary policy over the past 3 years, indeed the last 100 years.

Paul Krugman occasionally predicts things markets don’t see coming.  When he’s right, he racks up successes that I miss.  Often we have the same prediction.  But like the tortoise in Aesop’s fable, I believe that methodically inferring market forecasts of the effect of monetary policy will win out in the long run.  Indeed I think that markets have recently exposed some weaknesses in his view of the relative potency of fiscal and monetary policy at the zero bound.

There’s still a long way to go, and markets will continue to make mistakes on occasions.  But if we’ve learned anything over the past three years it’s that monetary policymakers ignore market signals at their peril.

PS.  I just noticed a German blog called Kantoos Economics, which seems to also favor stable NGDP growth.  I can’t read German, but the graph is worth 1000 words.

PPS.  I just noticed The Atlantic picked up Avent’s post, perhaps the press will discover my blog someday.  🙂

Reihan Salam has requested my thoughts on a recent Economics 21 editorial:

Keep in mind that this editorial is part of an ongoing conversation. It is very possible that the Italy analogy is flawed. I’m hoping that Scott Sumner, Karl Smith, and others who favor a more aggressive use of monetary accommodation will weigh in on the editorial.

I’ve seen Salam on Bloggingheads.tv, and he always struck me as a very thoughtful and innovative conservative.  [Any jokes using the term ‘oxymoron’ will be stricken from the comment section.]   So I decided to respond to the Economics 21 piece:

Rather than focus obsessively on the inapt comparison to Japan, the Fed should be more concerned about the growing similarities between the U.S. and 1970s Italy. Italy experienced financial crises in 1974 and 1976 spurred by large current account deficits, excessive public spending, and a central bank that acquired Italian government debt by printing money. These crises required external financial assistance, led to abrupt and disorderly swings in public finances, and bred political instability. The country moved from economic stimulus, to severe fiscal and monetary contractions, back to expansionary policy. Balance of payments difficulties were persistently addressed through currency depreciation to gain competitive advantage. From June 1972 to August 1977, the Italian lira fell from 579.71 versus the dollar to 884.76 – a depreciation of more than 34%.

The chart below compares recent U.S. public financial data to that of Italy in the 1970s. Relative to 1970s Italy, the U.S. has run larger current account deficits and generated slower economic growth. The U.S. investment rate has barely exceeded Italy’s anemic 13.5% average, and the dollar’s depreciation against gold has been only somewhat less steep than the lira’s fall in the 1970s. The U.S. budget deficit is much larger, although this comparison is difficult to make because official Italian budget deficits tended to understate the government’s true financing needs, which exceeded 12% of GDP in 1977.

[click on Economics 21 link above to check out table of data here]

Between 1974 and 1976, the Italian central bank printed lira in mass quantities to buy Italian government debt. This “large scale asset purchase” program led to a more than 100% increase in the monetary base. This was actually a much smaller increase in the monetary base than that engineered by the Fed’s money printing operations. From February 2008 to February 2010, the U.S. monetary base increased by more than 150% – from $822.54 billion to $2.11 trillion. The Italian central bank accelerated its money printing in conjunction with a “large fiscal reflation” package adopted in August 1975, much as the Fed’s quantitative easing began roughly the same time as the fiscal stimulus.

Although the stimulus and money printing succeeded in generating positive growth in 1976, it also precipitated a crisis in the lira. Mario Monti, later competition commissioner of the European Union, predicted the crisis in late 1975 based purely on observed growth in base money. Foreign creditors – responsible for financing 7.2% of GDP in domestic Italian borrowing during 1973-76 – fled Italian securities causing the value of the lira to fall by 35% in less than five months. Less than two years after the last crisis, the Italian financial system was again embroiled in a panic as printing money to accommodate spending in excess of income at both the government and national levels widened current account deficits and triggered a foreign investor revolt.

There are certainly some similarities to Italy, but are they the important ones?   Relying on memory, I think Italy’s problems were roughly as follows:

1.  In the 1970s growth slowed dramatically from the 8% of the go-go 50s and 60s (remember La Dolce Vita?) to a sub-par rate ever since.

2.  If one combines this sharp economic slowdown with a rather dysfunctional political system, you get a fiscal crisis.  When there is political gridlock, the easiest way out is printing money.

3.  The base rose rapidly and this contributed to high inflation and currency depreciation.

How does this compare to the US?  There are some obvious similarities.  We had a real shock in our real estate industry (perhaps comparable to the 1973 oil shock.)  We seem to be adopting bad tax and regulatory policies that will slightly slow our trend rate of growth (but nowhere near as much as in Italy.)  We have political gridlock, which leads to big budget deficits.  And we have current account deficits.  But I think the differences are much more important.

1.  The monetary base in the US has risen for exactly the opposite reason as in Italy, but the same reason as in Japan.  In Italy the base was monetizing the debt, and this produced high inflation.  In the US the base growth is a response to the demand for liquidity during the banking crisis, the payment of interest on reserves, and the very low nominal interest rates and inflation rates.  I doubt we’d have suddenly started paying interest on reserves if the goal was monetizing the debt.

2.  In the 1970s Italy did not suffer from a shortfall in AD.  I am pretty sure that NGDP grew at a robust rate–their problems were supply side.  They did have occasional crises when high inflation led the government to tighten policy, leading to a boom/bust cycle.  In contrast, in 2009 the US saw the sharpest fall in NGDP since 1938.  Even if there had been no banking problems, a fall in NGDP that sharp (relative to trend growth) would have created a severe recession.  And the slow recovery of NGDP (as compared to 1983-84) makes a slow recovery in RGDP and employment almost inevitable.

3.  Despite all the QE in the US, the market indicators of inflation expectations remain quite low over the next 5 years.  In contrast, if TIPS and CPI futures had existed in Italy, I am certain they would have showed a loss of confidence in the domestic purchasing power of the lira.

4.  They did not cite the Rogoff data on banking crises, but I always like to remind people that the US banking crisis of late 2008 was a relatively rare version of what is otherwise a quite common phenomenon.  In the vast majority of banking crises the currency falls in the foreign exchange market.  Three counterexamples were the US in the early 1930s, Argentina around 1998-2002, and the US in late 2008.  In all three cases the currency rose strongly in trade-weighted terms, even in the midst the crisis.  That suggests that tight money (lack of AD) is either the root cause of the crisis (the US in the 1930s and Argentina in the late 1990s) or greatly aggravated a pre-existing banking crisis (the US in the second half of 2008.)

5.  I believe the fundamental problem in Italy was that some real economic problems were poorly handled by the government, and this led to irresponsible fiscal and monetary policies.  The US situation was much different.  Some real problems in the banking and real estate sectors led to a mild slowdown in late 2007 and early 2008.  But this wasn’t enough to lead to highly irresponsible fiscal and monetary policies.  Instead, a severe drop in NGDP relative to trend after mid-2008 (due to Fed errors of omission) led to a severe recession.  The recession was misdiagnosed as banking-oriented, and we first tried to fix banking.  Then we correctly noted AD (i.e. NGDP) was falling fast, but erroneously assumed the Fed could do no more, and went for fiscal stimulus.  Only recently have we realized that the Fed is the key, and we are doing what we should have done 2 years ago.  But even this seemingly large QE has only modestly raised inflation expectations over 5 years (from about 1.2% to 1.7%.)  Conservatives who draw comparisons with Italy are missing the AD problem, the elephant in the room.

Having said all that, I do agree that the recent trend toward higher taxes and regulations are causing “real” problems for the US economy.  I support many conservative ideas such as deregulation, abolishing the GSEs, vouchers, health saving accounts and tax and entitlement reforms that encourage savings.  But even if in the long run those issues are more important than AD shortfalls, we need to keep in mind that these reforms will be harder to achieve if an NGDP growth shortfall worsens the budget deficit and leads to inefficient programs like 99 week unemployment benefits.  In that respect Japan is an important cautionary tale.  They reacted to a monetary problem with inefficient fiscal actions.

Over the past two years I’ve warned conservatives that Paul Krugman would be able to gloat that he was right and they were wrong about our policies leading to high inflation and high interest rates.  Not many conservatives took my advice, and now Krugman has started gloating.  (Which will be the subject of my next post.)