EC391 >>>>>> EC101

Here’s Paul Krugman:

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.

.  .  .

We’re not talking about stupid people here; clearly, there’s something about the notion that the rules for policy depend on the situation that some economists just don’t want to understand.

Don’t you love the way he juxtaposes; “This isn’t hard folks”  “it’s just Macro 101”  “stupid people”  “don’t want to understand”  “hard time grasping this basic concept.”  Let’s translate this bit of Krugmanese as follows:

“I want to signal to my sophisticated readers that anyone who believes monetary stimulus can restore full employment at the zero bound is stupid, but I also want to be able to deny that I made that charge.  So I inject the term ‘stupid’, next to all sorts of other comments that imply I think they are stupid.  I’ll say my opponents are not stupid people, even as I imply they are.”

I don’t teach EC101, but I do teach EC391, which is monetary economics.  I use the number one textbook.  Here’s what it says:

Monetary policy can be effective in reviving a weak economy even if short term rates are already near zero.

So Frederic Mishkin is one of those non-stupid people who we all know (nudge-nudge), must be stupid.  Who else is not really stupid, but just acts like it?

Well there’s Ben Bernanke, who always insists that the Fed never runs out of ammunition, just that the costs and risks of buying back debt are uncertain.  And how about the costs and risks of issuing trillions in new debt?

Or how about Milton Friedman?

How about Krugman’s colleague Lars Svensson who wrote a paper discussing a “foolproof” plan for reflation when in a liquidity trap?

But as always, my favorite clueless economist is the guy that wrote the 1998 paper that revolutionized the way we think about liquidity trap; the paper that pushed the profession far beyond the simple EC101 model:

The point here is that the end of the Depression – which is the usual, indeed perhaps the sole, motivating example for the view that a one-time fiscal stimulus can produce sustained recovery, does not actually appear to fit the story line too well; much though by no means all of the recovery from that particular liquidity trap seems to have depended on inflation expectations that made real interest rates substantially negative.

If temporary fiscal stimulus does not jolt the economy out of its doldrums on a sustained basis, however, then a recovery strategy based on fiscal expansion would have to continue the stimulus over an extended period of time. The question then becomes how much stimulus is needed, for how long – and whether the consequences of that stimulus for government debt are acceptable.

That sounds sort of like Tyler Cowen.  Then there is this:

It may seem strange even to have a subsection mentioning monetary policy, given that everything up to this point has stressed the ineffectuality of such policy in a liquidity trap. However, as we noted at the beginning, only temporary monetary expansions are ineffectual. If a monetary expansion is perceived to be permanent, it will raise prices (in a full-employment model) or output (if current prices are predetermined).

Not just “strange,” but stupid.

Of course, if one expects interest rates to stay near zero indefinitely, the level of government debt hardly matters. But if one expects that at a sufficiently distant date real rates will become strongly positive again, the eventual size of that debt becomes an important concern.

The political point is that Japan – like, we might note, the United States during the New Deal – appears to have great difficulty working up its political nerve for a fiscal package anywhere close to what would be required to close the output gap. Exactly why is an interesting question, beyond this paper’s scope.

Does this mean that fiscal policy should be ignored as part of the policy mix? Surely not. On the general Brainard principle – when uncertain about the right model, throw a bit of everything at the problem – one would want to apply fiscal stimulus. (Even I wouldn’t trust myself enough to go for a purely “Krugman” solution). However, it seems unlikely that a mainly fiscal solution will be enough.

In 1998 the “purely ‘Krugman’ solution” was monetary stimulus, and now it’s fiscal stimulus, with monetary stimulus added on in a sort of “worth a shot” context.

I can already anticipate commenters telling me that Krugman has a right to “change his mind.”  Yes, but the 1998 liquidity trap paper was written after he changed his mind about liquidity traps.  This is the paper he frequently cites in his blog as representing his current views. I guess you could argue that he changed his mind again about the relative effectiveness of monetary and fiscal stimulus.  People have a right to change their minds as often as they wish.  But if they do so frequently, it makes little sense to cite EC101 as if it is some sort of holy writ.

From my perspective nothing can top the following Krugman comment from 1999, one year after his famous liquidity trap article:

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?

I’ve been asking the same question for 4 long years, and I have yet to receive an answer that makes any sense.  Maybe Krugman and I need to go back and study EC101.

HT:  Clark Johnson



50 Responses to “EC391 >>>>>> EC101”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    1. December 2012 at 10:45

    Touch of Carly Simon syndrome here Scott. It’s Alesina and Cowen that Krugman is going after, not you.

  2. Gravatar of Major_Freedom Major_Freedom
    1. December 2012 at 10:58

    There is also this comment from Krugman:

    “It is often suggested that by purchasing foreign assets the Central Bank can depreciate the exchange rate, and stimulate spending that way. As pointed out by Eggertsson and Woodford (2003), however, the interest rate parity implies that such a policy should have no effect upon the exchange rate, except in so far as it changes expectations about future policy.“

  3. Gravatar of anon anon
    1. December 2012 at 10:58

    “I’ve been asking the same question for 4 long years, and I have yet to receive an answer that makes any sense. Maybe Krugman and I need to go back and study EC101.”

    Even Japan is not like that anymore: they’re starting to ask that same question themselves. Rumors of Japan moving towards NGDP targeting may have been exaggerated, but it seems that some sort of change is actually happening there.

  4. Gravatar of Major_Freedom Major_Freedom
    1. December 2012 at 11:03

    Sorry, that link had this comment:

    The purpose of this paper is to show that the liquidity trap is a real issue – that in a model that dots its microeconomic i’s and crosses its intertemporal t’s something that is very much like the Hicksian liquidity trap can indeed arise. Moreover, the conditions under which that trap emerges correspond, in at least a rough way, to some features of the real Japanese economy. To preview the conclusions briefly: in a country with poor long-run growth prospects…the country therefore “needs” expected inflation….

    If this stylized analysis bears any resemblance to the real problem facing Japan, the policy implications are radical. Structural reforms that raise the long-run growth rate (or relax non-price credit constraints) might alleviate the problem; so might deficit-financed government spending. But the simplest way out of the slump is to give the economy the inflationary expectations it needs.

    The first quote isn’t from Krugman, it’s from Eggertson, and that quote from Eggertson is probably what Krugman had in mind when he made the (bolded) part above about inflationary expectations.

  5. Gravatar of ssumner ssumner
    1. December 2012 at 11:26

    Kevin, I’m afraid you are the delusional one. I mentioned Tyler Cowen, and never even implied Krugman was going after me. Don’t feel bad, many of my commenters struggle with reading comprehension.

    Glad to see you have no substantive criticism—that means I was on target, doesn’t it?

    anon, I hope you are right, but as of now I’d say the odds are strongly against the BOJ adopting NGDPLT.

  6. Gravatar of Steve Steve
    1. December 2012 at 11:30

    “Maybe Krugman and I need to go back and study EC101.”

    No, just Krugman.

  7. Gravatar of Steve Steve
    1. December 2012 at 11:33

    I love the old Krugman post but I thought you were going to go after this one instead:

    I found it very very weird that he presents a graphic showing how England and France both did much better when they exited the gold standard, and then used that as evidence that fiscal stimulus is required in a liquidity trap!

  8. Gravatar of Steve Steve
    1. December 2012 at 11:35

    Krugman isn’t just failing EC 101, he’s failing LOGIC 101!

  9. Gravatar of Kevin Donoghue Kevin Donoghue
    1. December 2012 at 11:44

    “…never even implied Krugman was going after me.”

    My mistake. I kept seeing references to Market Monetarist ideas in your post, whereas neither Cowen’s tweet nor Alesina’s Vox involved any such notions.

    Obviously I was hallucinating when I read this as your supposed paraphrase of Krugman:

    “I want to signal to my sophisticated readers that anyone who believes monetary stimulus can restore full employment at the zero bound is stupid….”

    Clearly you couldn’t have typed that, because you’re not delusional. My apologies.

  10. Gravatar of dtoh dtoh
    1. December 2012 at 12:20


    Krugman is a hyprocrite who will say anything and sacrifice his intellectual integrity to further his political agenda, which favors big government and high taxes on the wealthy.

    I think this is pretty obvious.

  11. Gravatar of Liberal Roman Liberal Roman
    1. December 2012 at 12:25

    I have mentioned this before but there is a cornucopia of Krugman’s writing from the 90s in which you read it and he sounds like one of the VSPs he often ridicules. There are articles written by him lambasting Democrats on a wide arrange of issues such as the minimmum wage, their opposition to free trade and most telling his opposition to fiscal stimulus.

    But this post from Krugman about a year ago explained a lot to me:

    He leads off the post by saying: “I was deeply radicalized by the 2000 election.” He continues by saying how shocked he was that a politician would lie (Bush) and get away with it. That statement explains a lot to me. I feel that after that election he believed that Rovian tactics and political doublespeak is justified. Or to put it simply, the ends justify the means. After 2000, it’s almost as if he was replaced by someone else. Now he employs tactics like don’t emphasize or pick fights with liberals on issues you disagree with them and simply highlight the issues you agree with them on. Pretty much the opposite of someone like Yglesias.

    In 2008, I remember him being almost apologetic in his rhetoric as he couldn’t help but write posts that the spike in oil prices was not due to speculation but supply & demand.

    To summarize, I think Krugman believes that the most important issues of our time is more stimulus and more income redistribution. And the party that carries that torch is the Democratic party so he must look away from their faults as they are minor. In my personal opinion, that makes Krugman a political hack.

  12. Gravatar of dwr dwr
    1. December 2012 at 12:49


    I think in his 1998 article, Krugman is making a public choice theory argument: ostensibly he believes that fiscal policy works but is often never done to the degree that it closes the output gap. It does however seem like Krugman thought both monetary and fiscal policy are equally important. His statement “if one expects interest rates to stay near zero indefinitely, the level of government debt hardly matters” and the statement about Japan’s “political nerve” are pretty consistent with some of the things Krugman’s been saying the last couple of years.

    With that said, Krugman did erroneously downplay the importance of monetary policy today. When I first read that earlier this morning, my immediate reaction was to wonder if Krugman flip-flopped on monetary policy again. Sometimes I’m not entirely sure whether he actually thinks strong monetary policy is important and occasionally gets blinded by politics, or if he pretends to think it’s important to appease his critics.

    His 1999 article is really eye-opening, though. I wonder if Krugman thinks Japan was a special case, or if he just erred (either today or then).

  13. Gravatar of Jason Jason
    1. December 2012 at 14:06

    “Macro 101” should cover the Krugman view, the Cowen view, the Sumner view, the Friedman view, and a probably a couple of other views I have left out.

    Not allowing for the possibility that *all* of these views potentially contain valuable information is reason enough to send one back to Macro 101.

    Although I do think Cowen seems to want to tackle the 1% effects before the 10% effects … Especially when he wants to use the 1% effects to throw out the 10% effects with the bath water. (For evidence, just look at any time Cowen cites Mulligan.)

    (The macro economy measured with NGDP appears to be a straight line in log space over the history of the data, so that sets the scale of order 1 effects.)

  14. Gravatar of Dimitar Dimitar
    1. December 2012 at 14:13

    Krugman often differentiates between orthodox and unorthodox monetary policy. He seems to consider the former worthless right now and the latter potentially very useful when done properly.

  15. Gravatar of Dimitar Dimitar
    1. December 2012 at 14:23

    @ Liberal Roman:

    You haven’t read Krugman enough. He often blasts the Obama administration, especially in the blog. It just happens that the other side is bananas.

    What is interesting that no one complains about Mankiw being a political hack. That guy actually works for the Republicans and never criticizes them and no one seems to mind.

  16. Gravatar of Kevin Donoghue Kevin Donoghue
    1. December 2012 at 15:24

    Exacly right. As he wrote back in January 2009:

    “Well, my definition of a liquidity trap is, purely and simply, a situation in which conventional monetary policy “” open-market purchases of short-term government debt “” has lost effectiveness. Period. End of story.

    “Now, if you prefer a different definition of a liquidity trap, OK; call our current situation a banana, instead. But changing the name does not change the essential fact “” namely, conventional monetary policy has lost effectiveness.

    “Yes, there are other things the Fed could do “” and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments. And there’s a much stronger case for fiscal policy than in normal times, because we don’t know how well these unconventional measures will work.”

    (His emphasis.)

  17. Gravatar of DOB DOB
    1. December 2012 at 15:38

    Since we’re on the subject of the effect of asset purchases, may I respectfully remind you there’s a comment that I’d greatly appreciate your feedback on when you have a chance 🙂

    How was the “100 Global Thinkers” event btw?

  18. Gravatar of Al Al
    1. December 2012 at 16:08

    I agree with Dimitar and Kevin Donoghue. I doubt that regular readers of Krugman’s blog come away with the view that the Fed is out of bullets. He frequently writes about the expectations channel:
    “Changing inflation expectations may be similar in its implications to just cutting rates, but it’s very different in terms of implementation. The Fed can cut rates simply by telling the open-market desk to make it so; it can only change expected inflation by shifting market beliefs about what it will do some years down the road “” by credibly promising to be irresponsible, as I put it way back when “” which is a much more iffy task.”
    “Skipping ahead, inflation targeting “” which was my original contribution here “” is of course about credibility, since you don’t have immediate leverage over inflation while the economy is still depressed.


    True, short-rate expectations are about the future “” but they’re about the near future, so there’s much less of a credibility issue. Having the Fed say that it will probably keep rates low until 2014 in the face of a depressed economy is very different from having it say that it will keep rates low until inflation hits 3 or 4 percent.”

    That second link is all about “unconventional/conventional” Fed tools.

  19. Gravatar of Al Al
    1. December 2012 at 16:14

    Rereading Krugman’s article, I totally see why Scott Sumner wrote this response. Krugman doesn’t clearly delineate his policy logic and his economic logic. You can read through his blog, searching for “irresponsible” or “expectations”, to find support of the viability of the expectations channel. But he doesn’t integrate that economic logic with his policy logic that the Fed will not go down such a path for various reasons.

  20. Gravatar of Mike Sax Mike Sax
    1. December 2012 at 18:11

    Dimitar I’ll add my aye


    I think what happened in 2000 was a lot more than just someone telling a lie. Many people continue to believe that the election was stolen.

    I wonder why Liberal Roman has a problem with Krugman allegedly employing “Rovian” tactics but it’s ok for the actual Karl Rove to engage in them.

  21. Gravatar of Jason Jason
    1. December 2012 at 19:04

    Going with what Al said and adding to my point above, I don’t think the statements:

    –The Fed won’t engage in large scale monetary stimulus at the ZLB

    –The Fed can’t engage in large scale monetary stimulus at the ZLB

    are distinguishable as economic models.

    Sumner’s (and Bernanke’s) model, where the US Fed could engage in monetary stimulus, but irrationally (per Sumner) or rationally (per Bernanke) chooses not to, has the same end result as the Krugman interest-rate-mechanism-fail-equals-monetary-stimulus-fail model.

    Does the Krugman model *predict* our current predicament? It seems a more explanatory model than Sumner’s insane-Fed where they could get out of this mess if they simply choose to target NGDP. Maybe Krugman’s model explains why we aren’t in Sumner’s world**. He does say that it is hard for the Fed to promise to be irresponsible. NGDP targeting is just a promise to be irresponsible in this sense!

    If we look at Reinhart and Rogoff, we see that countries seem to languish after financial crises. Is this because of some property of the economic damage caused by financial crises, or because most countries make poor policy decisions after financial crises? (e.g. Yglesias tends to think the latter.)

    If anyone has looked at models of the budget deficit, you can see a similar problem. The predictions are these exponential curves that fly off to +infinity. The reality is a roughly flat line bouncing around -2.5% of GDP:

    If I was predicting the budget deficit, I’d draw a line at -2.5% of GDP out for the next 75 years. Congressional behavior (and economics) is implicit in this model much like Fed behavior is implicit in Krugman’s model. Congress and the economy will conspire to reduce the budget deficit the same way the Fed won’t engage in sufficient monetary stimulus at the ZLB (resulting in R&R-style languishing).

    **Not say I don’t believe Scott’s model! I do!

  22. Gravatar of StatsGuy StatsGuy
    1. December 2012 at 19:20

    Scott, you need to recognize that Krugman takes a very narrow view of monetary policy. Consider the following question:

    Would monetary policy work at the zero bound IF the federal government is required to run a fiscal balance? You will answer yes. I mostly agree (remember, I’m in the Joe Gagnon school).

    The operative question is, WHAT IS THE INSTRUMENT OF MONETARY POLICY? This is similar to asking the question HOW DOES MONEY GET INTO THE REAL ECONOMY? You have a tendency to abstract from this (neatly avoiding the distributional issue), but how money gets into the economy matters a lot:

    1) Above the zero bound, interest rates will do the trick. Money enters (leaves) as debt holders save (spend) on interest payments. Velocity increases as more projects become profitable, etc. etc. You can argue what’s doing the job, but who cares, really?

    Thing is, Keynesians like Krugman like to define monetary policy as manipulation of rates – that’s how money gets into the economy – the argument being that anything else isn’t monetary… It’s inherently fiscal.

    2) At the zero bound, there’s QE. Money gets into the economy because the Fed buys assets. Of course, according to Krugman, if the fiscal balance is flat, this mechanism is reduced. There’s still the outstanding debt load, but the government could exhaust this eventually. Then what?

    Krugman would argue that QE (of this sort) inherently involves a fiscal component, and isn’t purely monetary. (Remember, I’m a gagnonite – I neither really care much, nor can even tell the difference between fiscal and monetary at these gray areas.)

    Without the Federal debt, the question is what form monetary policy takes? Buying private debt (MBS) is obviously one option, especially since such a huge chunk is already federally guaranteed.

    Interestingly, all of these policies generate income for the treasury (owning risk free assets with free money), and even though it’s “trivial” in any given year (only 80 billion dollars or so), the threat of that indefinitely – and of increasing the scale of it – could easily be considered fiscal.

    Likewise, buying MBS could be considered fiscal, since it decreases the cost of home ownership – it’s an implicit fiscal subsidy of housing, which is arguably paid for by the owners of capital.

    Buying corporate debt and stocks could be considered an equally significant intervention.

    I still don’t know what is purely monetary (though rate adjustment comes closest). If the Fed were to dump huge amounts of money into the banks on reserve, but still tell them they had strict solvency requirements and capital/asset ratios – would monetary policy work? You could use negative IOR, but at what point do banks just start going under (unless you soften the solvency or cap/asset ratio requirements)?

    3) True helicopter drops – is that monetary, or fiscal? How can a helicopter drop not change the relative wealth of different sectors in society (as you’ve often noted, we don’t even know how to measure wealth – is someone 25 years old and healty with a PhD in a desirable field and 100k in debt wealthier or poorer than someone who’s 65, unemployable, and has 400k in savings?)

    So you see, any argument that monetary policy has worked will come against Krugman’s “aha, but that’s not really just monetary policy argument!”. And the whole thing degenerates into silly semantics. (By the same token, there’s no such thing as purely fiscal policy too, so long as government determines the money supply.)

    Spending time arguing that we should target NGDP (or level target it) is a lot more productive than wasting bytes on this back and forth with Krugman. Arguing that monetary policy is effective at the zero bound isn’t what made you famous – lots of people are hollering about that.

    Arguing that NGDP is the best practical solution made you famous.

    I rather think your post about good/bad federal expenditures was pretty good, by the way – you’re really good when you work on applications of theory to practical policy.

  23. Gravatar of Benjamin Cole Benjamin Cole
    1. December 2012 at 20:00

    I cannot understand the reluctance of the economics profession to embrace QE. More than that, aggressive QE that targets a floor NGDP for four straight quarters.

    At $100 billion a month, or Scott Sumner style, $40 billion a month and rising until NGDP targets hit.

    Is it that hoariest of shibboleths, that monetizing debt is a sin? Immoral?

    It is not a sin if moderate inflation and real growth are obtained. It is a virtue.

    I do not understand Krugman’s take on aggressive QE. I would guess he would at least like to try it, but he stays in the fiscal deficits doghouse. That did not work in Japan.

    QE from 2001 to 2006 worked in Japan, so said John Taylor, and they experienced their longest postwar expansion in that same period. They suffered no inflationary outbreaks, to say the least.

    Despite $2 trillion in QE, in the USA the Cleveland Fed index of inflationary expectations is at record lows.

    Surely, we can try aggressive QE with very little risk, while taking huge $1 trillion chunks out the national debt or reducing tax loads on taxpayers.

    If QE is played right, we can: 1. Reduce indebtedness. 2. Boost economic output 3. Cut tax loads.

    What is there not to like?

    Balance these three huge positives against the chance that moderate inflation might result.

    Seems like a prudent chance to take.

  24. Gravatar of Intro Instructor Intro Instructor
    1. December 2012 at 20:08

    Why is it so obvious that Krugman is wrong while Mishkin is infallible? I’m no Krugman-ite but he’s right.

    The ability of monetary policy to have an expansionary effect on aggregate demand depends upon the assumption that an expansion of the monetary base is then followed by the issuance of loans. That’s not what’s happening, a cursory glance at the bank’s holding of excess reserves ( indicates that either banks are unwilling to lend out the additional funds they are receiving or consumers and businesses are unwilling to borrow. I believe it’s most likely the latter as what we have recently experienced is a balance sheet recession characterized by substantial debt overhang. As a result, monetary policy is largely impotent (and would be even if we weren’t faced with the ZIRP issue).

    Take a look at this excellent recent diagram by NOMURA:

    This isn’t hard, folks ;p

  25. Gravatar of Intro Instructor Intro Instructor
    1. December 2012 at 20:13

    As for Ben Bernanke stating that the Fed never runs out of ammunition – what else would you expect from the chairman of the most influential central bank in the world?

    Just think of the chaos that would be unleashed if Bernanke came out and stated that Monetary policy is impotent in the context of our current economic climate – pandemonium!

  26. Gravatar of Austin Austin
    1. December 2012 at 20:36

    Even if nominal rates are zero, the real rate can still be driven negative, encouraging investment, no?

    Seems like that could be effective to me, but what do I know?

  27. Gravatar of Bob Murphy Bob Murphy
    1. December 2012 at 20:53

    Kevin Donoghue I am suspicious of your motives, but I can’t dislike a guy who makes a Carly Simon reference and keeps it subtle. Bravo!

  28. Gravatar of Bob Murphy Bob Murphy
    1. December 2012 at 21:08

    Scott, wow, this was awesome. I wasn’t aware of the “Krugman solution” phrase before; absolutely amazing.

    Scott we need to come up with rhetorical tricks analogous to “invisible bond vigilantes” and “confidence fairy.” I propose that from now on, we use the term “Krugman solution” to mean someone ripping the crap out of people who say the same thing you yourself said in the past, but now is inconvenient for your political views.

    Also don’t miss this one.

  29. Gravatar of Scott Sumner Devastates Paul Krugman on the Liquidity Trap Scott Sumner Devastates Paul Krugman on the Liquidity Trap
    1. December 2012 at 21:19

    […] Bob Wenzel tipped me off to this one… Sumner absolutely destroys Krugman in this post. (Also, I have street cred for making such a […]

  30. Gravatar of Bonnie Bonnie
    2. December 2012 at 00:13

    I get a hint that when some talk about how QE might be transmitted to the economy, there is an assumption that if Congress doesn’t spend more than it already does, the Fed would have little to buy if it chose to expand QE3 with Treasuries alone. Given that we currently have trillion dollar deficits for at least the next couple of years, it seems a bit of an irrational assumption to make.

    I think the current spending level is more than enough to offer plenty of buying opportunities for the Fed – and then some. We don’t need huge tax or spending increases, and we don’t need huge spending cuts, right now anyway. My opinion is that all the radicals on both sides of the isle need to cool their jets and stop trying to take advantage of a bad situation – it only prolongs the turmoil and economic suffering of otherwise innocent people. Let’s just get back to normal.

  31. Gravatar of Bonnie Bonnie
    2. December 2012 at 00:15

    I mean aisle, not isle. Sorry.

  32. Gravatar of Saturos Saturos
    2. December 2012 at 00:39

    ♫♪♫ Krugman’s Roasting On An Open Fire… ♫♫♪

    Merry Christmas Scott!

  33. Gravatar of Saturos Saturos
    2. December 2012 at 00:41

    Krugman: Bah! Humbug!

    Bob Murphy: Employing your eponymous solution, I see, Professor Krugman?

    Krugman: Fire and damnation! Don’t they know that I’m trying to run a business here?

  34. Gravatar of Saturos Saturos
    2. December 2012 at 00:58

    Krugman: What reason have you got to be merry? The budget’s austere enough.

    FRED: What reason have you got to be miserable? There’s deficits enough.

    Krugman: There is no such thing as deficits enough; only austerity enough.

    CEA: How much monetary easing may we put you down for, sir?

    Krugman: Nothing, sir

    CEA: Ah, you wish to remain anonymous!

    Krugman: I wish to be left alone, sir! That is what I wish! I don’t waste time advocating ineffective policies during a Depression and I cannot afford to make idle Bloggers merry. I have already suggested the way out of this slump and god knows I’ve dealt with enough frightful opposition from the Republicans and those in their pay on that one. If you need more demand accomodation then they are the ones you must look to for blame.

    CEA: Sir, continual expansion of the budget deficit may provoke an attack of the bond-vigilantes…

    Krugman: If the vigilantes must attack, then they had better do it and decrease the exchange rate and the surplus of savings. Good night, gentlemen.

    [walks away, then turns back]

    Krugman: Humbug!

    Talk is cheap, and Krugman liked it.

  35. Gravatar of Saturos Saturos
    2. December 2012 at 00:58

    Anyone else got any?

  36. Gravatar of Saturos Saturos
    2. December 2012 at 01:10

    Bonus points for imagining Jim Carrey playing Krugman…

  37. Gravatar of Scott Sumner Devastates Paul Krugman on the Liquidity Trap – Unofficial Network Scott Sumner Devastates Paul Krugman on the Liquidity Trap - Unofficial Network
    2. December 2012 at 03:25

    […] the Liquidity Trap Posted on December 2, 2012 by admin Whoa, Bob Wenzel tipped me off to this one… Sumner absolutely destroys Krugman in this post. (Also, I have street cred for making such a […]

  38. Gravatar of Ben J Ben J
    2. December 2012 at 04:22


    I’ll presume to make a point for Scott here,

    I think the ‘what to buy’ problem at the ZLB is not really relevant when expectations of future NGDP growth are low. Being at the ZLB creates the headache of trying to figure out what asset to swap for during QE to increase base money. The expectations of low NGDP growth (implying the risk of deflation) creates the problem in the first place.

    At the ZLB, there is no opportunity cost to holding cash and cash equivalents, etc, (we all know this story) and there is a perceived risk of deflation, so the demand for base money will balloon.

    I’ve seen Scott argue that the demand for base money will rise to meet the supply of base money to essentially limitless levels if the injections of money are ‘considered temporary’ (like Krugman mentions in the 1999 paper).

    If you have a NGDP level target with a robust expectations component, the issue of deciding which asset to buy to increase base money will never actually happen, because the base will be only a ‘normal’ level of GDP (about Australia’s level, or what the US was pre-ZLB).

    The whole “what to buy” problem is a mirage.

  39. Gravatar of Browsing Catharsis – 12.02.12 « Increasing Marginal Utility Browsing Catharsis – 12.02.12 « Increasing Marginal Utility
    2. December 2012 at 05:00

    […] Sumner’s sense contra Krugman. […]

  40. Gravatar of Boston Rob Boston Rob
    2. December 2012 at 05:58

    Whatever. Hasn’t Krugman always started name calling when he’s not being obeyed? The theory isn’t the issue here.

    “What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending…”

    LOL. Gun meet smoke!

  41. Gravatar of Steve Steve
    2. December 2012 at 06:46

    “Bonus points for imagining Jim Carrey playing Krugman…”

    I tend to imagine Robin Williams playing Krugman, and Jim Carrey playing Brad DeLong.

  42. Gravatar of ssumner ssumner
    2. December 2012 at 06:54

    Kevin, Now you are failing at logic 101. The fact that I mention my own ideas in a post, and also talk about Krugman as well, does not indicate that I think Krugman was directing his remarks at me. I really can’t understand how you are failing to grasp such an obvious point.

    If I criticize President Obama’s remarks, and then mention my own views, I suppose you will tell me that this means I am so delusional that I believe President Obama must be directing his remarks at me. Is that right Kevin? Is that really what you believe?

    As for your second comment, I love the way you defend Krugman by pointing out that even though his comment here is absurd, at other times he’s said things that are sensible. Isn’t that a pretty low bar for a Nobel-prize winner? You and I know what he “really believes,” I am responding to what he writes in this post, which is what 99% of his readers (wrongly) believe he really believes. And can you blame them?

    dwr, You are being far to generous–he clearly states that monetary policy was his preferred option in both 1998 and 1999.

    Again, it’s fine that he changed his mind, but then don’t refer to EC101–these are very contentious issues, far from settled.

    Statsguy, It makes no sense to say QE is really fiscal policy. Almost all monetary policy actions by the Fed, even prior to 2007, were QE. The Fed buys T-securities to increase the money supply. That’s as monetary as monetary policy can get. Indeed Krugman calls QE monetary policy whenever he tries to claim monetary policy is ineffective at the zero bound. So even Krugman doesn’t agree with you. I get very impatient with these silly word games. Everyone knows that open market operations using Treasury debt are monetary policy. Don’t become like one of those nutty Austrians who say inflation is not rising prices.

    Intro, You said;

    “Why is it so obvious that Krugman is wrong while Mishkin is infallible? I’m no Krugman-ite but he’s right.”

    No one claimed it was. The question of who is right has no bearing on this post.

    And Bernanke had the same beliefs when he was an academic, so your other comment is also wrong.

  43. Gravatar of Kevin Donoghue Kevin Donoghue
    2. December 2012 at 10:02

    Scott, if you’re going to accuse me of “failing at logic 101” it might be better not to do so under a post where you seek to “translate this bit of Krugmanese” in order to attribute to Krugman a view which he clearly does not hold. In the passage you quote, he is alluding to the “case for fiscal stimulus and against austerity” and saying nothing at all about the case for using (unconventional) monetary policy instead of fiscal stimulus. Yet somehow the latter choice figures largely in your faux-translation.

    You’re not translating. You’re constructing a straw Krugman. This is something that teachers of logic are wont to discourage.

  44. Gravatar of Dimitar Dimitar
    2. December 2012 at 12:46

    I forgot to add that by 1999 the Japanese had both tried stimulus and immediately after it austerity.

    The status quo wasn’t that everyone was crazy about stimulus in Japan ’99 (actually neither in US ’09, World ’12 or probably ever). Add in the conventional/unconventional dichotomy of monetary policy it seems pretty un-hypocritical.

    So ‘stimulus is unsustainable because of debt’ takes a new meaning when you consider there is a significant risk that the government intends to roll it back.

    And considering everything else besides the out of context quotes I don’t think he changed his mind since that beloved “it’s baaack” paper.

  45. Gravatar of StatsGuy StatsGuy
    3. December 2012 at 06:28

    Ben J:

    “If you have a NGDP level target with a robust expectations component, the issue of deciding which asset to buy to increase base money will never actually happen”

    That is a very strong assumption, and a circular argument – for NGDP level target to function, the promise of injection must likewise be credible. And, in practice, real world liquidity and arbitrage constraints mean that injection WILL from time to time occur. Currently, the Fed is injecting quite a bit…


    I’m not trying to play word games, really. Krugman goes back and forth on what is and is not monetary policy. All I’m saying is, I don’t really care – in a sense, it’s irrelevant, just a definition. The real question is the mechanism of action.

  46. Gravatar of ssumner ssumner
    3. December 2012 at 15:29

    Kevin, Here is his exact words:

    “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.”

    The central bank can’t get the job done, so you need need fiscal stimulus, which is false. I didn’t make up that quote, he said it. There are no straw men here.

    Dimitar, You are infering meaning that I just don’t see–and I’ve followed the Japan debate quite closely. Believe me, he’s changed his mind—which is fine. But none of this has anything to do with EC101. Grad courses dropped fiscal stimulus in the 1990s–nobody took it seriously anymore. Krugman’s way off base, he seems out of touch with mainstream new Keynesian econ, circa 2000.

    Statsguy. That’s exactly my point. Krugman says OMOs don’t work. I don’t care if people call QE fiscal or monetary policy, the question is whether or not they work. Krugman says no they don’t (when at the zero bound.)

  47. Gravatar of Major_Freedom Major_Freedom
    3. December 2012 at 16:06

    According to White, in 2005 the Fed employed about 27 percent more full-time macro- and monetary (including banking) economists than the top 50 US academic economics departments combined, while disseminating much of their research gratis through various in-house publications or as working papers. Perhaps not surprisingly, despite a thorough review of such publications White could not find “a single Fed-published article that calls for eliminating, privatizing, or even restructuring the Fed.”

  48. Gravatar of John David Galt John David Galt
    8. December 2012 at 17:45

    Thank God that Krugman’s addiction to calling his opponents names will make it impossible for him to ever be President. Because he would be just like Obama.

  49. Gravatar of Learning From Brad DeLong and Paul Krugman Learning From Brad DeLong and Paul Krugman
    2. January 2013 at 00:26

    […] In the late 1990s Krugman thought that there was only dubious theoretical justification, and perhaps not a single historical example, […]

  50. Gravatar of Learning From Brad DeLong and Paul Krugman – Unofficial Network Learning From Brad DeLong and Paul Krugman - Unofficial Network
    2. January 2013 at 01:07

    […] In the late 1990s Krugman thought that there was only dubious theoretical justification, and perhaps not a single historical example, […]

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