Krugman on mainstream macro during the crisis

On Monday I made this observation:

Lars Svensson is one of the few policymakers who will come out of this debacle with his reputation intact.  I’m surprised Krugman hasn’t mentioned him in his blog posts.  (They are colleagues at Princeton.)

Yesterday Paul Krugman made this observation.

In Sweden, my former colleague Lars Svensson, now at the Riksbank, is concerned about the desire of his colleagues to raise interest rates in the face of inflation far below target and an economy that is a long way from having fully recovered. But what does he know? He’s just one of the world’s leading monetary economists, having spent a great deal of time studying problems of monetary policy at the zero lower bound.

But that’s not the reason for this post.  This is:

Snark aside, the rise of the pain caucus is truly amazing – I’m a hardened cynic, yet even I didn’t see that one coming. As Posen points out, mainstream macroeconomics – which suggests that we need a lot more stimulus, monetary and fiscal – has actually held up very well in this crisis; it has, above all, made the right predictions about inflation and interest rates, while the doctrines underlying the pain caucus have gotten it all wrong. Yet “serious” policy makers are rejecting the theory that works in favor of theories that don’t.

Exactly.  And the same thing occurred in the Great Depression.  The most respected monetary theories going into the Great Depression were the more progressive price level/NGDP targeting views of people like Fisher, Keynes, Hawtrey, Cassel, Pigou, Hayek, etc.  And their predictions of the catastrophic implications of a big drop on the price level and/or NGDP were borne out.  And policymakers completely ignored their advice and went with their gut instincts.

Even though I spent much more time studying the Great Depression than Krugman, I was even more wrong about the response of monetary policymakers than he was.  (I.e., I was more optimistic.)  A triumph of hope over experience on my part.



17 Responses to “Krugman on mainstream macro during the crisis”

  1. Gravatar of W. Peden W. Peden
    30. September 2010 at 08:27

    On the subject of sensible central bankers-

  2. Gravatar of Benjamin Cole Benjamin Cole
    30. September 2010 at 08:51

    “A triumph of hope over experience.”

    Well put. Every year I think the Dodgers have a chance take the World Series; I ran a furniture-making business for 20 years thinking next year would be the bog one.

    And I didn’t even have the advantage of logic and reason on my side, as you have had.

    Stay optimistic; better than the alternatives.

    And, whether by osmosis or other methods, your monetary insights seem to be gravitating towards the top. Who knows? It may be the first time that blogging has helped shaped a major nation’s monetary policy–and makes one shudder what would be the case without the Internet.

    The pre-Internet option: A nicely written article, years in the making, in an obscure academic journal explaining why we are still in a recession?

    Keep blogging.

  3. Gravatar of JimP JimP
    30. September 2010 at 09:05

    I have said this before – but I think the rise of the deflationists – the pain camp – comes about because what is going now is not some neutral technical question of what is best for all of us. That is the fantasy world of Rawls.

    This is class war. And the deflationists are winning. It is really pretty simple.

    Scott at one time pointed to the surprising, and recurring, fact that during the (last) depression, actions that made the market rejoice (reflation) were greeted with pure hatred by some market participants (the WSJ) that one might think would be in favor of a rising market. But they are not in favor of a rising market. They are in favor of delation and want more of it.

    People like Casey Mulligan, Larry Kudlow, Allan Meltzer, zero hedge, are PERSONALLY INSULTED that there people in the world who dislike falling income. Wages in particular should be flexible on the downside, and where they are not lets just create enough pain so that they will be. People must face and personally acknowledge their falling social value, by directly seeing their incomes fall. Its a matter of morality – of decency.

    Don’t believe me? Just watch Kudlow or his deflationista guests sneer and foam whenever inflation and a falling dollar are mentioned. Kudlow is a perfect example of this – cause he is a stock market guy. One would think he would like a rising market, but not at the price of what he calls “king dollar”. He would very clearly rather see a falling stock market rather than a falling dollar.

    More than anyone I think it was Earl Thompson who saw the political side of all this. And he was hardly a red Rawls.

    Of course I am exaggerating. Or am I? What would the Republicans do if they got in. They are consciously the party of wealth – of the current owners of the currency. And they have promised deflation. It must be because that is what they want.

  4. Gravatar of Morgan Warstler Morgan Warstler
    30. September 2010 at 10:00

    Why do you allow Krugman to mis-construe it as the pain caucus?

    It isn’t a belief that pain makes us stronger, its a belief that the wrong people have hold of the hard assets… certain people right now are meant to have the hard assets held by others. false price is precluding that because defaults are not being allowed to happen naturally.

    And of course rectifying that will cause some pain, but pain isn’t an of itself the end…

    productivity gains are.

  5. Gravatar of Morgan Warstler Morgan Warstler
    30. September 2010 at 10:35

    Also, I told you guys earlier about using the MERS violations to allow people to simply walk away from their house without the credit ding…

    Step one is under way:

  6. Gravatar of Indy Indy
    30. September 2010 at 13:42

    I was certainly wrong on the Interest On Reserves – I thought that that would have been eliminated by now. I did expect several rounds of Quantitative Easing in a kind of “let’s see how it goes, and if inflation remains subdued and we really, really need to do some more, then, ok, we’ll do a little more”.

    It looks like that is what is going to happen, and I expect inflation to return to around 2%. I still wonder though – in a world where large parts of the economy are automatically adjusted for inflation by contract or law, will it really have much of a wallop? Social Security, Medicare/aid, Government/Union wages and pensions, and in a world where all the baby boomers are retiring?

    I also thought that the FDIC-bank deposits scheme would at least be under discussion for elimination, especially since the FDIC looks to be pretty deep in the hole for years to come.

    If your cash is guaranteed by the government, then, by all means, *deposit it with the government*, or the Fed, and the banks can either borrow from the Fed or raise actual private capital to extend credit.

    This seems so far off the policy table it’s in fantasy-delusion world, but not being an actually crazy idea, I’m not sure why.

    I also thought the whole FHA/Fannie/Freddie Behemoth would at least be targeted for an eventual sunset and wind-down as it exited the mortgage market. This too, apparently, is in la-la land, but seems completely sensible to me.

  7. Gravatar of TravisA TravisA
    30. September 2010 at 17:20


    I am sure you plan to, but I hope you take on this post by Krugman:

    And this post by DeLong:

    I am not sure whether DeLong and Krugman consider US bonds safe assets in this situation. If so, it just boggles my mind that they think the demand for safe assets (and cash) would remain constant if the Fed announced that it was buying $5 trillion of US govt debt.

    Why oh why do DeLong and Krugman think that it is so difficult to create inflation? The assumptions behind their models make it difficult for them to use common sense. They are actually feeding the intellectual climate that the Fed’s job is difficult. It isn’t!

  8. Gravatar of marcus nunes marcus nunes
    30. September 2010 at 17:46

    I was coming over with the exact same link and was going to say that to be taken seriouly you have to be “complicated” independently of your underlying point of view (“left” or “right”)

  9. Gravatar of scott sumner scott sumner
    30. September 2010 at 17:52

    W Peden, Thanks, he’s on the right side.

    Benjamin, I’ll keep blogging until they do what I say. Then I’ll cut back somewhat.

    JimP, I usually assume people are well-intentioned, just misguided. But it is very frustrating.

    Morgan, I think some do believe pain makes us stronger. It’s like the War on Drugs, which also goes after painkillers.

    Indy, Yes, I thought they’d do something about the GSEs, I get more cynical everyday.

    BTW, there is no guarantee QE will work, it depends on how they do it, and what signals they send about their inflation target, and their exit strategy. But I think it will at least help, so I’m still very hopeful they do it.

    Travis A. Done.

  10. Gravatar of scott sumner scott sumner
    30. September 2010 at 17:53

    Marcus, Good observation.

  11. Gravatar of Richard W Richard W
    30. September 2010 at 17:55

    The problem is you and Krugman are trying to understand the economics of the pain caucus. There are no economics involved only psychology. Scratch beneath the surface and one finds only pure hair-shirt puritanical moralising. The pain caucus quite simply believe pain is good for us and people ought to suffer.

    Introducing morals to economics will always lead to bad conclusions when the system is amoral. You recommend monetary policy that will get the economy moving and they see it only relieving suffering so should be resisted. Former positions will be regularly contradicted with absurd arguments why it is different now. The deflationists are just a contemporary version of moralisers who appear whenever there is some sort of crisis. I wish I was being overly cynical about the pain caucus but I suspect not.

  12. Gravatar of Morgan Warstler Morgan Warstler
    30. September 2010 at 18:00

    Scott, that’s a daydream meant to demean your opposition.

    The WRONG people have the hard assets.

    We of course can EASILY test my theory: you can base your whole approach to QE on putting the first dollar benefits DIRECTLY onto the guys with cash now.

    Then, when suddenly you are advocating dropping $$$ directly on the local Republican small businessmen, if they STILL demand “pain” – you’ll be right.

    Pay off Obama’s opponents, and they’ll side with you. How hard is that?

    One way to do this would be for, say it with me, the Fed to sell ALL the hard assets underlying the instruments on their books for pennies on the dollar – but only to non-bankers with cash.

    That’s really your only choice right now – the “pain caucus” has cash and wants a liquidation sale – so, fork over the gravy, pay them off, and you’ll get your QE.

    Don’t let the perfect be the enemy of the good Scott.

  13. Gravatar of JimP JimP
    30. September 2010 at 19:24


    I do not believe the WSJ is simply misguided. The want a strong dollar – and I think one reason Obama and Bernanke don’t act more forcefully is because they are frightened of the Journal and the other crazed deflationists. The deflationists are aware they are in a political contest, and they are aware that they are at this moment winning it, at least judging by the actions of both Obama and Bernanke, as well as the actions of Germany and Japan. The banksters cannot believe their luck.

    The Journal is well aware of what they want – and they do not want rising NGDP. They want falling wages. Falling wages mean higher profits – grossly higher at the moment. How could any sensible blood-sucking capitalist not like higher profits?

    Again – I am kidding – or am I?

    I think Krugman does so much harm – him and the endlessly snotty and arrogant DeLong – because they discredit the non-deflationist arguments with their idiocy and arrogance.

  14. Gravatar of Lorenzo from Oz Lorenzo from Oz
    30. September 2010 at 22:35

    JimP They are consciously the party of wealth – of the current owners of the currency. And they have promised deflation. It must be because that is what they want. Are they that clever? I ask this question seriously, because it is perfectly obvious that lots of clever people do not understand monetary economics. Starting, apparently, with President Obama.

    According to political donations by occupations, the Democrats are the Party of actors (97% of all donations from actors), musicians (96% of all donations from musicians), producers (92%), attorneys (76%), teachers and programmers (71% each) are favoured by CEOs (58%) and CFOs (57%) but not analysts (61% of donations to Republicans). Are therapists deflationists? (Or is that the wrong sort of analyst? My grasp of American jargon may be failing me.)

    It seems to me that the Republicans are more the Party of the middle folk (a lot of really rich areas have Democrat Representatives), and they are probably still far more scared of inflation than anything else — hence folks being inflation hawks. Which, from what Scott has been saying, would repeat Depression patterns. (Such a depressing phrase: but Scott must find it most depressing of the lot of us.)

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    30. September 2010 at 22:40

    JimP: They want falling wages. Inflation will get that, deflation will produce rising (real) wages, given nominal wages are sticky. Again, a Depression pattern.

  16. Gravatar of Morgan Warstler Morgan Warstler
    1. October 2010 at 08:13


    That’s exactly the issue. In America in every small town, there are Republicans – they own the stuff in the town, they employ the workers.

    THESE ARE THE PEOPLE who matter the most. They are big fish in small towns, they REFUSE to participate in any system that pulls the power and control of their triumphant lives away from the small pond where they are power centers.

    They are the rubber meets the road, down and dirty decision makers – jobs happen ONLY IF they are feeling it.

    The crass answer is this: this country is FOR the big fish in the small ponds – it is their country, it has been for 250 years. Our nation is not “America” it is the “United States of America,” structurally and historically we’re very much like the EU.


    Scott’s problem is PERFECTLY nailed down by DeLong…

    “The rise in the money stock will be offset by a fall in velocity. The transactions-fueling balances of the economy will not change because the extra money created by the Federal Reserve will be sopped up by an additional precautionary demand for money induced by the fall in the stock of the other safe assets that households and businesses wanted to hold.”

    Scott’s exposed backside is Velocity. We are STILL above 1.6, and we are headed down, down, down.

    WHICH IS WHY Lacy Hunt is the economist who get it right, he realizes that both the Fiscal stimulus players and the Monetary stimulus players are now fully exposed as impotent:

    1. Fiscal has ZERO multiplier.
    2. Monetary can’t do do more than make up for V (see MF).

    Scott, I’m not kidding… whether you like it or not, you face a POLITICAL problem… the lifeblood of this country’s employment is “small business country club Republicans.”

    They are ACTUALLY the WSJ’s subscriber base. Here, JimP gets it slightly wrong. They are ACTUALLY the Fox News core audience metric.

    And they are not deflationists without good cause, they realize neither DeKrugman’s policies or your policies are best for THEM.

    They have some cash in the bank, they know assets are overpriced, there is a crisis afoot and they are supposed to be swooping in and getting GREAT DEALS on property and wages.

    They do not seek pain.

  17. Gravatar of scott sumner scott sumner
    1. October 2010 at 17:41

    Richard W, It’s hard to believe that’s all there is–there’s a lot of respected economists. But I’m not seeing good arguments, so who knows.

    JimP, My hunch is the WSJ wants Obama to fail. I think it is that simple.

    Morgan, My head is spinning as I try to follow your logic from velocity to countryclub Republicans. I’m sure it all makes sense to you, but . . .

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