Benn Steil on Krugman

Benn Steil has a new piece in the Weekly Standard entitled:

Why is Paul Krugman Still Calling for Fiscal Stimulus?

Here’s an excerpt:

With the Fed having raised rates in December, the zero bound – for whatever it might have meant – is gone in the United States. This should mean Krugman, if he is truly following economic science as he claims to understand it, abandoning his calls for fiscal stimulus.

Yet he is not only still advocating a big increase in government spending, he is calling for government intervention to boost wages and union bargaining power. He further says that “mercantilism makes a fair bit of sense” in this environment. Yes, mercantilism – import barriers, export subsidies, and the like. Bring on the trade war.

Krugman justifies all this by arguing that we are still in a topsy-turvy liquidity-trap world because rates are “near zero.” Yet whatever debate we might have about the effectiveness of negative rates and QE, there can be no debate over whether we are in a liquidity trap. We are not. When the Fed’s policy rate is above zero, by any amount, it means that it has determined (rightly or wrongly) that – given the current stance of government fiscal and other policies – the appropriate rate for the economy is positive. Not zero or negative. Importantly, this also means that if the government does significantly increase spending, as Krugman wants, the Fed will react to the higher level of demand by raising rates more rapidly than it would otherwise have done. This will counteract the higher government spending; such effect is known as “monetary offset,” a concept which Krugman considers uncontroversial. Thus calling for fiscal stimulus with positive interest rates is the logical equivalent of wanting to eat more because you are a little bit pregnant. It makes no sense: you cannot be a little bit pregnant, nor can you be in a liquidity trap when rates are positive.

Krugman ended the 1990s sounding much more market monetarist than Keynesian.  As late as 1999, a year after his famous 1998 paper on liquidity traps, Krugman was still dismissive of fiscal stimulus, even at the zero bound:

What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?

By 2012 he had shifted from monetarist to new Keynesian, believing fiscal policy can be useful, but only when rates are at the zero bound:

People in my camp have repeated until we’re blue in the face that the case for fiscal expansion is very specific to circumstance — it’s desirable when you’re in a liquidity trap, and only when you’re in a liquidity trap.

Here’s another example from 2012:

From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you’re in a liquidity trap. In particular, the whole case for fiscal stimulus and against austerity rests on the proposition that with interest rates up against the zero lower bound, the central bank can neither achieve full employment on its own nor offset the contractionary effect of spending cuts or tax hikes.

This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept.

Notice that he’s exasperated with dumb people who believe what he still believed in 1999.

And there are dozens of other examples over the past 8 years.  As Benn Steil points out, Krugman has now shifted again, from new Keynesian to old-fashioned Keynesian.  Krugman was right that EC101 says fiscal stimulus doesn’t work when rates are positive.  EC101 also says that attempts to artifically raise wages will reduce employment.  Ec101 also says the protectionism will impoverish a country.  But EC101 doesn’t matter anymore to a growing number of Keynesians.  Keynesian economics circa 2016 is starting to remind me of the most extreme forms of supply-side economics from the 1980s.

One begins to wonder if the theory and evidence produce the policy implications, or if the policy needs are producing an ever changing set of ad hoc theories.

 


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43 Responses to “Benn Steil on Krugman”

  1. Gravatar of Morgan Warstler Morgan Warstler
    1. April 2016 at 13:25

    I think you demean yourself when you still mention Krugman.

    Meanwhile Roger Farmer is a rigourous old school Keynesian, his true heir as you to Friedman.

    You should give him the time you waste on PK.

  2. Gravatar of jonathan jonathan
    1. April 2016 at 13:30

    I’m not sure whether this is what Krugman has in mind, but he might just think that the Fed won’t consistently offset a fiscal expansion because they have the wrong model of the economy.

    The Fed raising rates doesn’t make a lot of sense as a response to current unemployment and inflation given their stated policy preferences. If we had current levels of unemployment and inflation and other variables, but the nominal rate was 4% instead of 0.5%, they probably wouldn’t be thinking about raising rates further at all.

    Instead, they have an idea of what the natural rate “should” be, and so they’re going to raise rates even though it’s not warranted by the underlying variables.

    This implies that if fiscal stimulus raises inflation and lowers unemployment, that may not prompt interest rates to rise any faster than otherwise. In other words, even though the Fed *could* offset the fiscal expansion, they won’t.

  3. Gravatar of Edwin Alvarenga Edwin Alvarenga
    1. April 2016 at 13:30

    Are there any examples of Krugman outright calling for fiscal stimulus recently?

    The article linked only has this vague call to action of “direct monetary and fiscal policy towards full employment,” which to me sounded like a general statement to use the tools when appropriate. Directing fiscal policy towards full employment could easily mean to use it when in a liquidity trap and not to use it when we’re out of one. Considering that Krugman believes low interest rates are here to stay for a while, he probably thinks the next downturn will likely get us to zero rates again, so it was worth noting the fiscal stimulus part.

  4. Gravatar of E. Harding E. Harding
    1. April 2016 at 14:35

    So, Sumner, you’re agreeing with my claim a month or so ago that Krugman still supports fiscal stimulus?

  5. Gravatar of Gordon Gordon
    1. April 2016 at 14:59

    Krugman the economist and Krugman the political pundit are two different beasts. If you always assume that his recent writing is being done by Krugman the economist, it will leave you scratching your head at times. If you assume that sometimes he is writing as Krugman the political pundit seeking to help the Democratic party then some of his recent positions may not be as puzzling. Hilary has had to skew to the left recently in order to hold Bernie at bay. So she has had to adopt his anti-trade and increased government spending rhetoric. And Krugman may be trying to provide some backing for these positions.

  6. Gravatar of james elizondo james elizondo
    1. April 2016 at 15:22

    Mr. Sumner

    haha good April fools joke you got us!

  7. Gravatar of Benjamin Cole Benjamin Cole
    1. April 2016 at 15:31

    Cut taxes, gun the presses.

  8. Gravatar of Art Deco Art Deco
    1. April 2016 at 15:31

    He’s not. Robin Wells is. Krugman’s teaching six hours a week, blowing off his office hours, and playing Doom on his computer.

  9. Gravatar of Art Deco Art Deco
    1. April 2016 at 15:33

    Krugman the economist and Krugman the political pundit are two different beasts.

    Aye. The political pundit has boobs and commonly answers to ‘Robin’. She also makes voodoo dolls of George W. Bush and throws them in the fireplace.

  10. Gravatar of Gene Frenkle Gene Frenkle
    1. April 2016 at 16:02

    The problem with Keynesians is that they “won” and now our economy features huge amounts of ongoing fiscal stimulus. So in 2009 Obama attempted to EXPAND welfare and INCREASE infrastructure spending and both programs proved ineffective. Why is that? The most productive welfare spending was going on in 2008 so the next dollar sees diminishing returns. What about infrastructure spending for stimulus? The California High Speed Rail will be completed in 2029!

  11. Gravatar of james elizondo james elizondo
    1. April 2016 at 16:16

    I don’t even know where to begin. I guess I’ll echo yglesis

    You’re pretty much saying “we’re at positive rates therefore no liquidity trap and yet he still wants fiscal policy? (correct me if I’m wrong)

    Let me answer for him.

    1) bond markets are pleading us to take on more debt. inflation-adjusted 30 yr u.s Bond yielding <1%!? thats awesome financing

    2) toxic water in flint, sorry electrical grid, congested freeways means we need public infrastructure. Something yellen nor the free market will provide.

    3) Unconventional monetary policy comes with all sorts of problems

    a) decreasing IOR- cut this too far and run the risk that ppl will hoard cash and we don't know if its legal
    b) QE- reduces risk and liquidity premiums boosting asset prices above fundamentals and making income equality worse. We've had QE1 QE2 and QE3, diminishing returns anyone?
    c) forward guidance- communication issues, credibility issues
    d) the wicksellian rate is really low and tough to reach. Monetary policy can make it lower by pulling demand and investment. You'll say it does the opposite by allowing higher NGDP but there's alot of uncertainty here. Fiscal policy doesn't have this problem by reducing the national savings rate raising the neutral rate.

    The optimal policy is a mix of fiscal/monetary policy. We're technically out of the liquidity trap cuz the yellen mistakenly raised rates. So what? We could easily fall to back to the zlb and then rely on the problematic tools I listed above.

    What's your point about Econ 101? It doesnt have all the answers right?

    "EC101 also says that attempts to artifically raise wages will reduce employment."

    does EC101 take into account a reduction in turnover? More motivated employees? Improved productivity? I'm not for $15 dollars an hour but lets not kid ourselves that the price ceilings and floors we learn when we're 18 is the be all end all.

    "Ec101 also says the protectionism will impoverish a country."

    wow huge dramatic statement. Free trade is great and has helped many countries including our own (i like the TPP) but lets be honest the biggest gains of free trade have been collected. Not one is advocating complete protectionism they're just aren't exaggerating future benefits of it.

    Keynesianism helps us answer questions about the economy. nothing more nothing less.

  12. Gravatar of james elizondo james elizondo
    1. April 2016 at 16:22

    I really enjoyed your Fed policy options post btw but can’t sign off on this one.

  13. Gravatar of Ray Lopez Ray Lopez
    1. April 2016 at 16:33

    Ben Stein wrote what? +1 for the April Fool’s joke.

    +1 to james elizondo. Plus, just the other post Sumner said that if the Fed prints money and just hands it to the Treasury (illegal today, done once during the US Civil War) it would be OK and as good as current monetary / fiscal policy due to today’s slack in the borrowing market. That seems to support Krugman’s thesis. Oh, btw, money is neutral and fiscal policy largely just transfers wealth from Peter the Taxpayer to Paul the bureaucrat, and does not increase GDP, but it does keep some people “off the streets”, with a multiplier of zero.

  14. Gravatar of Anand Anand
    1. April 2016 at 16:57

    I was wondering when you would mention Krugman’s post. I agree that he is being intellectually dishonest here, as to his reasons for supporting fiscal stimulus.

    However, I would again say that monetary offset is a supposed counterfactual, which may or may not occur. The important thing is that fiscal spending is theoretically under popular control, while Fed policy is supposed to be independent. Krugman has called for both to be more stimulative. It’s an “ought” scenario, rather than an “is” scenario. What is likely to happen is that there would be neither fiscal stimulus nor monetary stimulus.

    To quote some random person: “do more!”

  15. Gravatar of Anand Anand
    1. April 2016 at 17:02

    Just to elaborate on the monetary offset, in the late 90s, unemployment was very much down, much below whatever the natural was supposed to be, but Greenspan didn’t raise rates, because there was little or no inflation rise.

    So, it is not clear what policy the Fed follows, and it is not clear that the Fed will necessarily raise rates faster in an alternative scenario of more fiscal stimulus, but still rather weak growth/inflation.

  16. Gravatar of Scott Sumner Scott Sumner
    1. April 2016 at 17:26

    Jonathan, In economics it’s almost always possible to invent scenarios. But how plausible?

    Edwin, There are many examples of him doing so when economies were not at the zero bound, such as the eurozone in 2008-12. Also a recent example of him saying the liquidity trap model still applies today, when discussing mercantilism.

    Harding, Maybe, but do you have a quote?

    James, You said:

    “bond markets are pleading us to take on more debt. inflation-adjusted 30 yr u.s Bond yielding <1%!? thats awesome financing"

    That's known as "reasoning from a price change." (Google that phrase and see how many of my blog posts come up.) It also has no bearing on this post.

    And what does Flint have to do with fiscal stimulus? The purpose of fiscal stimulus is not to remove lead from the water supply of Flint. Fiscal stimulus is not government spending, it's deficit spending. This is the kind of comment that makes me wonder if Keynesians know what Keynesian economics is. Hint, it has nothing to do with big government. You can reduce government spending to 15% of GDP, and cut taxes to 1% of GDP. That's really small government and a really expansionary Keynesian stimulus.

    You said:

    "Unconventional monetary policy comes with all sorts of problems"

    We are not at the zero bound, and hence monetary policy is not "unconventional". And by the way, unconventional monetary policy does not come with any problems. The Fed made a massive profit by buying interest bearing Treasury debt with zero interest cash and 0.25% interest reserves. Unconventional monetary policy is highly profitable. So do more!

    You said:

    "The optimal policy is a mix of fiscal/monetary policy."

    So you think Krugman is a moron? I respectfully disagree. He has a Nobel Prize. When Krugman says there is no "case" for fiscal policy at positive rates, he is correct. Period, end of story.

    Anand, I like when Keynesian defenders talk about all these "uncertainties". I wish they did that more often.

  17. Gravatar of E. Harding E. Harding
    1. April 2016 at 17:49

    Naw, I still have no better quote than from last time.

    “Krugman’s teaching six hours a week, blowing off his office hours, and playing Doom on his computer.”

    -LOL! I still think he has a hand in writing his columns.

    “She also makes voodoo dolls of George W. Bush and throws them in the fireplace.”

    -Where’d you get that one from?

  18. Gravatar of james elizondo james elizondo
    1. April 2016 at 18:40

    “So you think Krugman is a moron? I respectfully disagree. He has a Nobel Prize. When Krugman says there is no “case” for fiscal policy at positive rates, he is correct. Period, end of story.”

    no but you must think bernanke is a moron as he’s quoted

    “A balanced monetary-fiscal response would both be more effective and also reduce the need to use unconventional monetary tools.”

    I can send u the link but I trust you read his blog. But coming from what you said you prob don’t. you say

    “And by the way, unconventional monetary policy does not come with any problems. The Fed made a massive profit by buying interest bearing Treasury debt with zero interest cash and 0.25% interest reserves. Unconventional monetary policy is highly profitable. So do more!”

    Problems:

    Negative rates: go so low and ppl may horde cash. Its not clear if the fed has authority to pay negative rates. May disrupt money markets funds as mgt fees dry up.

    QE: Hard communicating to markets see taper tantrum, may be experiencing dimishished returns, reduce liquity and risk premiums which may inflate assets e.g stocks, houses making income inequality worse

    Inflation target: why 4% why not 6% or 8%? Inflation targets may be in direct conflict of price stability.

    forward guidance: communication issues credibility issues.

    Rate targeting: buying so much of a given maturity fed could lose control of balance sheet.

    Monetary policy can drive down the real neutral rate. You’ve countered this before with saying there would be higher ngdp but im not convinced.

    This is the kind of comment that makes me wonder if Keynesians know what Keynesian economics is. Hint, it has nothing to do with big government.

    I”m not a keynesian economist but thank you. Fine fiscal spending is not government spending its deficit. Well lets ramp up the deficit by borrowring at low rate and fix our highways,schools etc

    Not saying we shouldnt use unconventional monetary policy but they’re def problems

  19. Gravatar of james elizondo james elizondo
    1. April 2016 at 18:42

    there not they’re :/

  20. Gravatar of Benjamin Cole Benjamin Cole
    1. April 2016 at 18:45

    OT but in the ballpark: labor force participation rates are rising in the United States even as unemployment inched up 4.9% to 5% at last reckoning.

    This validates my contention that we are in a demand side recession.

    The Fed should print money until we’re wiping our rear apertures with Benjamin Franklin’s. And please, no sanctimonious sermonettes from little boys in short pants about inflation.

    Japan has spent itself silly and gone to QE and they still don’t have inflation.

    Please send a few more freight trains of paper ank ink to the Fed.

  21. Gravatar of Benjamin Cole Benjamin Cole
    1. April 2016 at 19:36

    Add on:

    The Bank of Thailand has a 1% to 4% headline CPI IT.

    2016 headline inflation seen at 0.8 pct – c.bank

    By Aukkarapon and Niyomyat

    BANGKOK, Dec 29 Thailand’s central bank will maintain its current headline inflation target of 1-4 percent next year to guide its monetary policy, with a wide range giving it leeway to manoeuvre.

    The band, the same target range used for this year, was approved by the government on Tuesday, Finance Minister Apisak Tantivorawong told reporters after a weekly cabinet meeting.

    The headline inflation of 2.5 percent plus or minus 1.5 percentage points will also be a medium-term target as it is in line with economic fundamentals, the ministry said in a statement.

    –30–

    So, a developing nation central bank is obtaining better results and has a smarter monetary policy than the U.S. Federal Reserve.

    Do you suppose the Fed could ever learn from a foreign central bank?

    Also, Thai central bankers recently hinted the baht was too strong.

  22. Gravatar of Ray Lopez Ray Lopez
    1. April 2016 at 22:00

    @B. Cole, a sometime turkey farmer in Thailand:

    “The Fed should print money until …”.

    You do realize that when the Fed prints money it’s to buy bonds, so somebody has to give up valuable collateral, presumably said valuable collateral is backed by something valuable that is…something like money.

    So cut to the chase: do you believe the Fed should print money and hand it over to the Treasury to spend, as the ex-MN Fed chair recently said would be not that inflationary? Anyway, you don’t mind inflation so do you like this idea? Sumner your guru said that in these dead times it won’t be inflationary anyway.

    Well, do ya, punk?

  23. Gravatar of Salem Salem
    1. April 2016 at 23:53

    One begins to wonder if the theory and evidence produce the policy implications, or if the policy needs are producing an ever changing set of ad hoc theories.

    Ding ding ding. You’re finally starting to get it.

  24. Gravatar of Benjamin “Punk” Cole Benjamin "Punk" Cole
    2. April 2016 at 02:58

    Ray–

    If the Fed prints money and buys bonds I consider that to be stimulative. It will be stimulative until we reach full economic output in the United States, except that’s very hard to do as we import so much capital, machinery, goods, services and even labor.

    Basically I think we would see Full Tilt Boogie Boom Times in Fat City for seven or eight years before we got to inflation above 3 or 4%.

    Excluding housing. The US should ban property zoning.

  25. Gravatar of Derivs Derivs
    2. April 2016 at 03:46

    ““Krugman’s teaching six hours a week, blowing off his office hours, and playing Doom on his computer.””

    Great image…

    Krugman: Teaching is just a way to pay the bills until I finish my novel.
    Pinto: It must be very good.
    Krugman: It’s a piece of shit. Would anyone like to smoke some pot?

  26. Gravatar of Art Deco Art Deco
    2. April 2016 at 05:27

    -Where’d you get that one from?

    It may have been in the New York Times magazine, I forget. There was a profile of the two of them which included a scene from a small gathering of friends they had (on election night 2004, IIRC) where she in fact did that. His topical commentary prior to 2001 was not particularly partisan and the only people I can recall him cutting up were professional rivals (Lester Thurow and S.H. Hanke, both of whom were too good humored to reply more than obliquely). Literary form criticism I know nothing about, but the abrupt change in the substance and disposition of his columns ca. 2001 strongly suggests either he suffered a stroke or he wasn’t writing them anymore. His publications in academic and professional venues the last 8 years have included little in the way of new research; if you scrape away the after dinner remarks and the surveys of the current scene that only get published because Paul Krugman’s name is on them, what remains is more what you’d expect of a rank-and-file state college teacher.

  27. Gravatar of Brian Donohue Brian Donohue
    2. April 2016 at 05:54

    Very good documentation here. Nice work.

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. April 2016 at 06:46

    http://www.newyorker.com/magazine/2010/03/01/the-deflationist

    ————quote————
    Once Obama won the primary, Krugman supported him. Obviously, any Democrat was better than John McCain.

    “I was nervous until they finally called it on Election Night,” Krugman says. “We had an Election Night party at our house, thirty or forty people.”

    “The econ department, the finance department, the Woodrow Wilson school,” [Robin] Wells says. “They were all very nervous, so they were grateful we were having the party, because they didn’t want to be alone. We had two or three TVs set up and we had a little portable outside fire pit and we let people throw in an effigy or whatever they wanted to get rid of for the past eight years.”

    “One of our Italian colleagues threw in an effigy of Berlusconi.”

    “I put out some coloring paper and markers so that people could write stuff on it and throw it into the fire. People really felt like there was stuff they wanted to shed! I had little hats and party whistles.”
    ————endquote————

  29. Gravatar of collin collin
    2. April 2016 at 07:29

    In 1998 and 1999, the US was riding so high and the BRICs were on the verge of massive growth the next ten years. He had yet to see the coming huge consumer debt accumulation of the Bush Boom (which did a lot for BRICS back then) and even after the Asian flu Japan still appeared close the liquidity trap in the 2000s. Viewing Japan the 25 years I see that monetary policy

    I do believe Krugman is correct that the AD curve is problem here, long term fiscal policy is not the solution. Again I believe it is the key driver is demographic impact is larger than what fiscal or monetary can accomplish.

  30. Gravatar of Jacob Aaron Geller Jacob Aaron Geller
    2. April 2016 at 09:11

    I agree with the gist of Benn’s piece, but I quibble with the idea that Paul Krugman considers the inevitability of monetary offset by the Fed to be “uncontroversial.” I don’t think he does.

    I haven’t seen anything recent from Krugman suggesting an unqualified belief in monetary offset, and when I click through to the linked blog post (in Benn’s piece) I don’t see Krugman saying quite what Benn is suggesting. What Krugman said in that post is that without monetary offset in the EU, Greek austerity is (was) contractionary. That’s not the same thing as believing that the Fed would offset fiscal stimulus in the US.

    I do *wish* that Krugman believes in monetary offset, but don’t have any evidence that he actually (currently) does… if it exists I’d love to see it.

    PS — Matt Yglesias certainly *seems* to believe in monetary offset, at least sometimes and at least in response to “good news” about job numbers or GDP growth or something (see the 2nd-to-last paragraph in his 2015 Vox piece “Is last week’s jobs report a sign of a real recovery?”). Yet Yglesias seems not to have made the connection between his understanding of the Fed’s response function and his understanding of the likely effects of fiscal stimulus (and about his related claims about how things like minimum wage increases boost “demand”). Yglesias’ belief in monetary offset has not yet bumped up against his belief in fiscal stimulus etc., and I don’t know why…

  31. Gravatar of ssumner ssumner
    2. April 2016 at 10:07

    James, I don’t know how many times I have say this, but negative rates are the result of tight money, not easy money. Why do you think the eurozone and Japan have negative rates—have you looked at their NGDP growth over the past decade?

    And monetary stimulus at positive interest rates is not “unconventional”.

    Inflation targeting is a stupid idea, they should do NGDPLT. In that case, QE won’t be needed (unless the NGDP growth rate is set very low.)

    You said:

    “Well lets ramp up the deficit by borrowing at low rate and fix our highways,schools etc”

    Our schools don’t need “fixing”; we spend more on education than other countries already. Let’s do tax cuts if you insist on fiscal stimulus. Start with eliminating all taxes on capital.

    Ben, You said:

    “This validates my contention that we are in a demand side recession.”

    We are not in any recession at all, words have meaning.

    Jacob, He certainly seems to have believe in monetary offset in 2012. Today I’m not so sure. Yglesias has done posts explaining his reservations about monetary offset, I believe he has doubts about it when rates are zero.

  32. Gravatar of james elizondo james elizondo
    2. April 2016 at 10:48

    “James, I don’t know how many times I have say this, but negative rates are the result of tight money, not easy money. Why do you think the eurozone and Japan have negative rates—have you looked at their NGDP growth over the past decade?

    This could be my fault but I dont think were talking about the same thing. I believe your talking about the real rates while I was referring to a tool that the fed can use to stimulate growth which is the rate they charge banks on reserves. Unless im wrong thats a discretionary decision by central banks not something the market determines. This is an unconventional monetary tool and I was listing potential problems with such as the possibility of cash hoarding, if its legal, disruptive to money market funds etc. If im wrong please correct cuz I dont want to sound like a jackass.

    “And monetary stimulus at positive interest rates is not “unconventional”.

    I get that. But not too long ago we were up against the zlb where unconventional policies applied. We could easily hit the zlb soon.

    “Our schools don’t need “fixing”; we spend more on education than other countries already.”

    Well some schools are adequately equipped with the tools to help their students succeed and others are not. Lets spend more to reduce that divergence. Can you not see that? Also, young ppl graduating today with loads and loads of student prob hinder them for many years. Im not for free college but perhaps more government spending could alleviate this. Its that simple I know.

    “Let’s do tax cuts if you insist on fiscal stimulus. Start with eliminating all taxes on capital.”

    I like low capital gains tax but it is a driver of economic inequality at least in the short run.

    How about we compromise? I’ll advocate zero capital gains tax and you advocate for government spending on infrastructure. Deal?

  33. Gravatar of james elizondo james elizondo
    2. April 2016 at 10:49

    its not* that simple I know

  34. Gravatar of Benn Steil Benn Steil
    2. April 2016 at 11:03

    Jacob – Re monetary offset, the purpose of my link was not to show that Krugman believes the Fed will do it in any specific case; it was to show that he considers the concept conventional (that is, Greece could have and should have used monetary offset if it had independent monetary policy). That the Fed considers the current positive rate of interest, and higher positive rates in the near future, appropriate given current growth expectations seems clear: check out this post – http://blogs.cfr.org/geographics/2016/04/01/feddotplotters/

  35. Gravatar of ssumner ssumner
    3. April 2016 at 16:32

    James, My point is that negative IOR is only necessary because central banks have run contractionary monetary policies, producing very low NGDP growth. The only way you can solve that problem is with faster NGDP growth, which requires easier money.

    You said:

    “Well some schools are adequately equipped with the tools to help their students succeed and others are not.”

    All American schools are equipped with the tools that students need to learn. The problem is that some students study and some do not.

    I’d gladly agree more infrastructure spending if combined with a progressive consumption tax.

  36. Gravatar of Eric L Eric L
    3. April 2016 at 17:24

    If the zero-lower-bound is a bad place to be, then being right above zero, such that the next time a recession comes around the Fed has little room to act before we’re right back at the ZLB, is not a particularly wonderful place to be either.

    “Importantly, this also means that if the government does significantly increase spending, as Krugman wants, the Fed will react to the higher level of demand by raising rates more rapidly than it would otherwise have done.”

    I’m in favor of this happening. Mind you, I’m not in favor of the Fed just raising rates when no economic indicator warrants it, but I’m in favor of congress creating a situation which creates actual inflation and I’m in favor of the Fed raising rates to counteract that. Let’s make it a goal to get to higher interest rates before the next recession starts.

  37. Gravatar of james elizondo james elizondo
    4. April 2016 at 06:07

    “I’d gladly agree more infrastructure spending if combined with a progressive consumption tax.”

    Deal

  38. Gravatar of james elizondo james elizondo
    4. April 2016 at 08:57

    ““So you think Krugman is a moron? I respectfully disagree. He has a Nobel Prize. When Krugman says there is no “case” for fiscal policy at positive rates, he is correct. Period, end of story.”

    I was thinking about this comment. Not the Krugman part but the claim that there’s not case for fiscal policy at positive rates (or in your view at the zlb)

    I may be taking this out of context but what if a country is facing a trilemma like China? I think a case for fiscal policy can be made strongly in this case and would like to know your view.

    How I see it

    1) China is combating slower growth with expansionary monetary policy encouraging capital outflows.

    2) China wants to liberalize and have an open economy. For proof they’re allowing citizens to invest up to $50,000 abroad. So they would like to have free capital flows.

    3) China would like a fixed heavily restricted currency.

    What can be done? Restrict capital flows may not even work as companies circumvent these policies. Buying Yuan with Dollar reserves is unsustainable. Letting the Yuan (or renminbi I dont know) devalue significantly may be counterproductive since global gdp would take a hit. Further monetary policy encourages capital flight devaluing the yuan.

    The answer to these problems may be fiscal policy. Strengthen the social safety net would discourage high savings rates, help consumer confidence. Fiscal policy would also help the transition to a more consumer-centric economy

  39. Gravatar of ssumner ssumner
    4. April 2016 at 14:40

    Eric, How would fiscal stimulus now result in higher rates when the next recession hits? Fiscal policy cannot always be more expansionary than average, so you want it more expansionary than average (if you are a Keynesian) during recessions, not expansions.

    James, China will need those high savings in the future, for demographic reasons, so I oppose attempts to discourage the Chinese from saving. I’d rather see them devalue. I don’t see why it should hurt the global economy, especially if it’s just by 10% or so.

  40. Gravatar of james elizondo james elizondo
    4. April 2016 at 14:53

    “especially if it’s just by 10% or so.”

    I guess the issue is if it would only be by 10%. What if it wants to depreciate more? I have no idea where the level is to break Chinas trilemma but if it devalues too much it could be largely deflationary for the global economy. And if so the devaluation would be counterproductive as fewer Chinese imports are taken in. right?

  41. Gravatar of Eric L Eric L
    4. April 2016 at 21:06

    I guess if temporary is a part of your definition of stimulus then what I said doesn’t make sense, but that’s not what I meant. And the Krugman articles criticized by Steil aren’t proposing time-limited stimulus proposals like ARRA either. Yes, you want fiscal policy to be more stimulative than average in a slump, but congress isn’t particularly good at timing things around the business cycle. What I’m arguing for is changing the average — make fiscal policy more inflationary for the foreseeable future. That should allow for a monetary offset that can be undone when a recession hits.

  42. Gravatar of emerich emerich
    6. April 2016 at 04:48

    It occurs to me that the only thing that explains Krugman and his shifting views over the years is that he is a revenue-maximizing firm. What views will maximize the demand for his written wisdom from the right (left) publications, his notoriety as the scourge of the right, and his speaking fees?

  43. Gravatar of ssumner ssumner
    7. April 2016 at 08:38

    James, I can’t imagine they would want to depreciate by more than 10%. And any negative effects on others could be offset by a more expansionary monetary policy.

    Eric, You said:

    “I guess if temporary is a part of your definition of stimulus”

    The standard Keynesian argument is that stimulus in only effective if it is temporary. Stimulus is generally measured as the change in the cyclically adjusted deficit (or spending). So it’s the change that matters, not the level.

    emerich, I have no reason to doubt his sincerity.

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