Is it fair to accuse Paul Krugman of inconsistency?

As you may know, a number of bloggers have suggested that Krugman’s views on monetary policy have been inconsistent.  Here is his response:

Some readers are clearly confused about my stance on unconventional monetary policy. In some posts I have expressed skepticism about how effective the Fed can be; in others I have called on the Fed to do more.

But these aren’t contradictory positions.

I believe that given the grim economic situation, all players in the game should be trying to do whatever they can. There are other things the Fed can do; they would help; uncertainty about how much they would help shouldn’t be a reason not to try.

You might be surprised to read that I can see Krugman’s point, although I don’t completely agree.  I think I’ve followed his writings on macro as closely as almost anyone else, and I can see how the model he used to analyze Japan in the late 1990s is pretty flexible in its policy implications.  The relative merits and effectiveness of monetary and fiscal policy depend on all sorts of judgments about what is politically feasible, as well as the credibility of various monetary policy options.  I almost never see Krugman make a statement that is flat out 180 degrees inconsistent with what he said earlier.  Instead, I have three other problems with his posts on monetary policy.  I’ll list them in order of importance, starting with the least important.

Sloppiness –I am way busier than I’d like to be, and I can imagine that Krugman is much busier than I am.  So it’s not surprising that he might quickly skim someone’s post, and misinterpret the argument.  Even so, when he does that to me it is annoying.  The first time he responded to my blog he seemed to assume I was simply advocating conventional open market purchases, when I was clearly advocating unconventional open market purchases and inflation or NGDP targeting.  I am pretty sure that even back then he would have agreed with me if he had read the post more carefully, but he responded as if he just skimmed the first few paragraphs.  In revenge response I was able to find quotations that made him seem inconsistent, whereas it was probably more a question of sloppiness.  Of course that’s just my ego at work, and is of trivial importance.

Political miscalculation– In early 2009 Krugman complained that fiscal stimulus was too weak.  Instead of pushing hard for monetary stimulus, he seemed to devote most of his effort into pushing harder for fiscal stimulus.  I happen to think even a larger fiscal stimulus package would have been mostly ineffective, for all sorts of reasons, so I encouraged him to switch his focus to monetary stimulus.  I think everyone would now concede now that the level of fiscal stimulus that would have been needed was politically impossible, even if fiscal stimulus is effective.  Some of the accusations of inconsistency come from readers who notice Krugman now pushing the Fed much harder to inflate, after seeming to disparage the effectiveness of monetary policy in 2008 and 2009.  And that is what Krugman is responding to in the quotation above.

Poorly communicating the message –The preceding complaint feeds into what I think is the most important problem with his writings on monetary policy.  The vast majority of his readers interpreted his 2008-09 posts on monetary policy as supporting the old Keynesian “pushing on a string” view.  And this is not really surprising, as Keynes really did hold that view, and Krugman likes to quote Keynes and also kept saying we needed to relearn the insights of the General Theory.  But Krugman’s own “expectations trap” model was different in some very important ways.  No longer is all monetary policy ineffective at the zero interest rate bound, only currency injections expected to be temporary are ineffective.  Krugman’s biggest fear was that the conservative nature of modern central bankers would make people think that currency injections would in fact be temporary.  When the base doubled and the economy continued to deteriorate, Krugman naturally saw events confirming his views on expectations traps.

Krugman’s readers missed the fact that there is something central bankers could do in this situation.  He believed the actions might not work, but would at least be worth trying.  The most important step would be to set a higher inflation target.  But the Fed, ECB and BOJ weren’t even doing that.  Nor were they willing to do price level targeting.  Nor NGDP targeting.  Nor getting rid of interest on reserves.  Etc, etc.

So here’s the problem I have with Krugman’s money posts from 2008-09.  It’s not that I don’t think he understood what was going on with monetary policy.  Indeed in one respect he was ahead of me–I had assumed that a Bernanke Fed would react more aggressively to the deflation of late 2008.  My complaint is that when I read his posts it was obvious to me that they were written in such a way that 99% of his readers would interpret his message as; “Don’t waste time with monetary policy.  It can’t do much at zero rates.  Put all your effort into fiscal policy.”  I talked to many intelligent people who read Krugman all the time, and every single one thought that was his message.

I can understand why Krugman feels frustrated that people don’t see the nuances in his argument.  I think I do see those nuances.  But Krugman is an important and talented communicator who is read by many of the movers and shakers in Washington.  Think about how those Fed seats lay empty for 18 months.  Why weren’t people screaming about the issue 18 months ago?  Part of Krugman’s worldview is the belief that there’s a lot more the Fed could be doing.  I am more confident than he is about how well these things would work, if implemented by an aggressive central bank.  But even he thinks they are very much worth trying, and thus we aren’t far apart.   So who’s fault is it that his readers failed to get that message for almost 2 years?  And why is the liberal blogosphere only now demanding easier money, when we desperately needed easier money in September/October 2008, when TIPS spreads/stocks/commodities/real estate prices/industrial production were plummeting?


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22 Responses to “Is it fair to accuse Paul Krugman of inconsistency?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    26. July 2010 at 15:18

    I sometimes think the two political parties, and their adherents, are forever stuck fighting the last wars, or re-fighting the 1960s.

    So, liberals often act or talk as if Selma, Alabama and 1962 were just yesterday, and conservatives act and talk like the Cold War or similar threats never ended (certainly in terms of military outlays). Of course, a panapoly of self-interested groups has grown up and feeds upon such perceptions.

    And so Krugman is stuck, calling for federal deficits to grow (although he did disagree with Peter Galbraith, who recently opined that debts could grow forever). In fairness to Krugman, monetary policy has been on the backburner for a couple decades, as inflation was tame and deflation was not a threat. So, perhaps not that much need to think about monetary policy.

    I think Krugman is coming around. If he can get his ego out of the way.

    I hope we can transition the country to a new era, without over-reliance of state welfare and social programs and a much, much smaller military, and an aggressive confident Fed. Well, it is fun to think about, anyway.

  2. Gravatar of scott sumner scott sumner
    26. July 2010 at 16:22

    Benjamin, Yes, I too am an optimist, at least about the long run.

  3. Gravatar of JimP JimP
    26. July 2010 at 16:32

    Another Woodford paper:

    http://papers.nber.org/papers/w16208

  4. Gravatar of JimP JimP
    26. July 2010 at 17:02

    Steve Hanke on why the Fed always wins.

    http://www.cato.org/pub_display.php?pub_id=12001

    HT:

    http://wallstreetpit.com/37208-monetary-policy-dominates

  5. Gravatar of Joe Joe
    26. July 2010 at 17:30

    The question, however should be, are you physically and emotionally ready for the sheer force of Krugman’s intellectual will once you publish your Great Depression book?

    I recommend Gold’s Gym…

  6. Gravatar of Doc Merlin Doc Merlin
    26. July 2010 at 17:38

    @Joe:
    Krugman is a smart guy, but it isn’t his intellectual will that is scary so much as his sarcastic wit.

  7. Gravatar of JimP JimP
    26. July 2010 at 18:24

    This might be why people are a bit worried about more spending.

    http://www.economics21.org/commentary/mid-year-update

  8. Gravatar of DanC DanC
    26. July 2010 at 18:57

    I think you are too kind to Krugman. He favors an activists government that redistributes resources to fit his notion of an equitable outcome.

    He favored fiscal stimulus, I think, because he discounts to almost zero the danger of a misallocation of resources.

    Not to mention his attacks on Friedman

  9. Gravatar of marcus nunes marcus nunes
    26. July 2010 at 19:16

    The “problem” with Krugman is that after becoming a NYT columnist and to top it off getting a NP, he think´s he must always have the “last word”. Pity because over the years he has lost much of the credibility he once had in spades.

  10. Gravatar of Joe Joe
    26. July 2010 at 21:06

    I don’t see any need to rip on him personally. He’s being partisan in the media because it works. I’m sure if you met up at a dinner party he’d be a great conversationalist and nice and great to get along with. I would love to meet him and talk about his idea in person just as I would with all of us bloggers, some sort of meeting for all of us big time bloggers. Where we could meet and bring up what we personally believe and share ideas. I also have tons of ideas for Brad Delong that I want to discuss. When it comes to Scott, if I ever met I’d barrage him with conversations and questions on economics. Most people are fine and great to get along with and discuss these ideas thats what the focus should be what we discuss. Not them…Also, does there exist some sort of Libertarian conference for blogosphere, for all of us who send these emails back and fourth.

    http://www.marginalrevolution.com/marginalrevolution/2009/01/dumping-on-robert-barro.html

    Here is another example of Krugman: this one was about Barro’s WSJ article on the stimulus:

    Barro uses multipliers from WWII to show how low such multipliers are
    -> Thus, the stimulus act was bad
    -> Krugman argues that you can’t use the war to model multipliers because we had rationing and price controls
    -> Cowen then responds with a quote by Krugman from long ago showing that krugman said that the war growth got us out of the war,
    -> HOWEVER, right at the bottom Cowen says that there isn’t necessarily a contraction (which I totally can’t see) between his criticism of Barro and saying the war got us out of the war

    Once again Sumner, great post!

    P.S. On a side note, I think I’m the only unemployed college graduate who spends his days studying macro-textbooks and these sorts of econ blogs, and discussing economics with professional economists, its crazy that economists like Delong, Miron, Mankiw, and hopefully Cowen, as of tomorrow have actually responded to emails I sent them. The world is amazing

    Anyways, a little drunk there.

  11. Gravatar of Joe Joe
    26. July 2010 at 21:14

    Also, professor Sumner, how is your manuscript coming along. I was looking forward to reading it, since it from what I read and understood (if we can call it that), it seems as if you are almost trying to finally create, after 70 years a full fledged understanding of the great depression in its totally, something no one has yet done. “A book to end all book” to explain all that funny stuff that was happened. To FULLY explain what was going on at the beginning, and why did it take just too darn long to end. I’m very excited to read it.

    Best,

    Joe

  12. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. July 2010 at 22:57

    Economists who start making calculations about political feasibility are straying outside their area of expertise and trading away what they can offer for a mess of political pottage. Greg Mankiw is surely right when he says Milton Friedman got it right on that:
    As Milton Friedman once put it: “The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.”
    In a time of economic uncertainty and political turmoil, we economists “” both in and out of government “” could hardly do better than to follow Friedman’s sage advice.

    Krugman’s antics surely just reinforce that Milt was correct.

  13. Gravatar of scott sumner scott sumner
    27. July 2010 at 03:35

    JimP, Thanks for the papers. In the abstract, Woodford says it is important to keep the interest on reserves equal to the fed funds target. Suppose the Taylor Rule says the fed funds target should be negative. I wonder if Woodford thinks the IOR should be negative in that case.

    Joe, I am not ready, but I don’t need to be because he won’t read the book.

    DanC, I was deliberately too kind. I thought my criticisms would be more credible in that case.

    marcus, He has become more partisan as he’s become entangled in policy debates. He thinks more in terms of goods guys and bad guys, or our team and their team, as compared to the 1990s when he often criticized Democrats from the right (Pop Internationalism, etc.)

    Joe, Yes, that is a good example of having it both ways. I am waiting to hear whether they will publish the book. I’ll let you know.

    Lorenzo. That’s a good quotation, and very appropriate in this case.

  14. Gravatar of Alejandro Alejandro
    27. July 2010 at 04:48

    Scott,

    I think you are being too soft on PK. He was not sloppy and he did not communicate poorly. He spoke perfectly clear to his target audience. Now, you are right that he miscalculated and after purposely pushing his own agenda for fiscal stimulus and bigger government he finds himself pushing on a string. He is trying to blame the recession on the Fed after claiming for 2 years that there was nothing the Fed could do. Maybe if he pushed for a more expansionary monetary policy in 2008 things would have been very different. Remember he was the Nobel Prize winner in that year, everybody was listening to what he said. Also lets not forget the way he treated everybody else (you included) that asked for more action from the Fed. This doesn’t leave Bernanke off the hook, because as you and PK have pointed out, the Fed has consistently missed its targeted inflation and given that actual inflation is lower than their target we can conclude that they are doing to little for their own standards (unless the story you told the other days about the Fed lowering their target with every recession is true).

    Alejandro.

    PS: Imagine what PK would be writing about you and every other economist that called for more monetary stimulus if you were now asking for more fiscal action.

  15. Gravatar of W. Peden W. Peden
    27. July 2010 at 05:19

    Joe,

    Unemployed graduate here and my degree isn’t even in economics. I’m not at the point I have anything useful to add to this blog’s discussions, but I’m learning a huge amount by reading them and it’s helping to lay the foundations for my future research.

  16. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2010 at 07:33

    Your inability to critically analyze Krugman for what he is offends. Macroeconomics barely exists, meanwhile politics absolutely exists.

    Krugman believes nothing. ENRON. His “economics” are defined situationally – whatever takes from those who have and gives to those who have not in the immediate term – is justified with econ jibber jabber.

    This is WHY he likes inflation built into the model, and why you are very much suspect. Its just another tax, and he’ll take as much of it as he can get before it slows down “growth.”

    He’s an intellectual cheat, and should be treated as one.

    The best thing to do with him, is constantly offer up revenue neutral changes to tax policy – anything that spurs on economy immediately without any further government revenue.

    This is actually the perfect time (after 2010 elections) to corner Obama with same – revenue neutral simplified tax codes. With this strategy, we should get more out of him, than we did from Clinton (he ended welfare for us).

    Also, tag after Public Employees via GOV2.0 productivity gains – where Krugman is weak. Force him into discussion on structural unemployment, get him to go on record, and then when employment improves – we’ll have another thing to beat Krugman into submission with.

  17. Gravatar of Fed Up Fed Up
    27. July 2010 at 08:54

    scott sumner said: “JimP, Thanks for the papers. In the abstract, Woodford says it is important to keep the interest on reserves equal to the fed funds target. Suppose the Taylor Rule says the fed funds target should be negative. I wonder if Woodford thinks the IOR should be negative in that case.”

    Assuming these negative interest rate “calculations” are correct, what should that be telling us about the “fungible” money supply (the amount of currency vs. the amount of debt)?

  18. Gravatar of Jaap Jaap
    28. July 2010 at 07:00

    don’t worry about Krugman, he is quoting DeLong quoting someone else quoting Mankiw to this effect:
    http://krugman.blogs.nytimes.com/2010/07/26/permanently-high-unemployment/

    but if he had bothered to read the original, he could’ve shown some more nuances…
    http://nationalaffairs.com/publications/detail/crisis-economics

  19. Gravatar of scott sumner scott sumner
    28. July 2010 at 07:36

    Alejandro, Yes, I may have been too kind, but it is better to err in that direction when criticizing someone.

    W. Peden. Thanks

    Morgan. Here’s the revenue neutral policy I’d like to see: Replace the corporate income tax with a carbon taxes. More growth and a clearer environment.

    Fed Up, It tells me that money is too tight (relative to debt) but perhaps I missed your point.

    Jaap, I agree. Mankiw’s post was waaaaay more nuanced than Krugman implies.

  20. Gravatar of ang ang
    28. July 2010 at 13:27

    As a liberal blog-reader and PK fan, I have to say your criticisms seem fair; PK should have been much more vocal about looser monetary policy. He is occasionally wrong and sometimes sloppy, though I would argue at relatively low rates. What I like about him is that he often tries to reason from the perspective of relatively simple models that attempt to distill the essence of complex phenomena. Obviously, if you completely disagree with his politics and/or dislike him personally, you’ll be less willing to trust that he’s arguing in good faith.

    As for monetary vs. fiscal policy, it was clear to most political observers in early ’09 that we weren’t going to get the $3 trillion 2-year fiscal stimulus needed to close the output gap. However, it also seemed pretty clear at the time that the Bernanke Fed wasn’t going to pursue a radical inflationary policy. Neither loose monetary policy nor fiscal stimulus in sufficient quantities seem politically feasible in general in liquidity traps; c.f. Japan.

    I’m not sure why the PK readers you talked to got the impression that he felt that monetary policy was impotent at the zero-bound in ’08-’09; he repeatedly talked about creating inflation expectations, saying like central banks need to “credibly promise to be irresponsible.”
    http://krugman.blogs.nytimes.com/2008/12/17/a-whiff-of-inflationary-grapeshot/
    I think the problem as he perceived it at the time was that Bernanke couldn’t credibly make this promise.

  21. Gravatar of Fed Up Fed Up
    28. July 2010 at 15:15

    scott sumner said: “Fed Up, It tells me that money is too tight (relative to debt) but perhaps I missed your point.”

    Can you expand on that?

    How much currency is there?

    How much debt is there?

  22. Gravatar of ssumner ssumner
    29. July 2010 at 07:48

    ang, You said;

    “He is occasionally wrong and sometimes sloppy, though I would argue at relatively low rates.”

    He’s better than he used to be. But he has commented on 4 or 5 of my posts. Two he completely misinterpreted.

    You said;

    “What I like about him is that he often tries to reason from the perspective of relatively simple models that attempt to distill the essence of complex phenomena. Obviously, if you completely disagree with his politics and/or dislike him personally, you’ll be less willing to trust that he’s arguing in good faith.”

    You’ll notice the comment section has several commenters who thought I should have argued that he acted in bad faith, that I was too nice to him. Maybe I am naive, but I think most people act in good faith. When they let their biases interfere, it is subconscious. I also like the way he uses intuition, and relies on simple models. I try to do the same.

    You said;

    “I’m not sure why the PK readers you talked to got the impression that he felt that monetary policy was impotent at the zero-bound in ’08-’09; he repeatedly talked about creating inflation expectations, saying like central banks need to “credibly promise to be irresponsible.”
    http://krugman.blogs.nytimes.com/2008/12/17/a-whiff-of-inflationary-grapeshot/
    I think the problem as he perceived it at the time was that Bernanke couldn’t credibly make this promise.”

    I know exactly why they misunderstood him. He often said there was nothing more the Fed could do, and that we needed to focus on fiscal stimulus. I’m glad you and I are among the 1% who saw what he was really trying to say.

    Regarding credibility, I’ve argued that in all of human history no central bank with an unconstrained fiat regime has set out to inflate and failed. Since central banks have never tried and failed to inflate under those circumstances, and Bernanke never even tried to set a higher inflation target, why in the world would Krugman assume it wouldn’t be credible?

    Fed up, I don’t pay any attention to the absolute amount of currency. I pay attention to whether the current amount is adequate relative to demand. If NGDP is below the policy goal, then we know the current stock of currency is inadequate.

    I don’t focus on debt at all.

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