When did Krugman change? And why?

Paul Krugman frequently suggests that his famous 1998 article (“It’s Baaack, Japan’s Slump and the Return of the Liquidity Trap”) led him to rethink the role of monetary and fiscal policy.  He says that the “expectations trap” model in that paper convinced him that monetary policy might be ineffective at the zero bound, and that fiscal policy might then become necessary.

Previously I’ve pointed to a 1999 Krugman essay that advocated monetary stimulus for Japan, and was quite dismissive of the idea of fiscal stimulus.  While cleaning out my office, I came across a Krugman editorial from the year 2000, which made similar arguments:

Japan has the dubious distinction of being the first major nation since the 1930’s to experience a “liquidity trap,” in which even cutting the interest rate all the way to zero doesn’t induce enough business investment to restore full employment. The result is an economy that has been depressed since the early 90’s, and that in 1998 seemed to be on the verge of a catastrophic deflationary spiral.

The government’s answer has been to prop up demand with deficit spending; over the past few years Japan has been frantically building bridges to nowhere and roads it doesn’t need.

In the short run this policy works: in the first half of 1999, powered by a burst of public works spending, the Japanese economy grew fairly rapidly. But deficit spending on such a scale cannot go on much longer. Japan’s government is already deeply in debt (about twice as deep, relative to national income, as the U.S. was before our own budget turned around). For the policy to do more than buy a little time, the recovery must become “self-sustaining”: consumers and businesses have to start spending enough to allow the government to return to fiscal responsibility without provoking a new recession.

Carping critics (like me) warned that there was no good reason to think this would happen. Sure enough, it hasn’t; as the big public works projects of early 1999 have wound down, so has the economy. . . .

Although the Bank of Japan has already reduced the short-term interest rate to zero, Western economists have pointed out that there are other things it can and should do: buy longer-term bonds, announce a positive target for inflation to encourage businesses to borrow. Indeed, textbook economics tells us that to adhere to conventional monetary rules in the face of a liquidity trap is not prudent; it is irresponsible. (Full disclosure: I personally have been the most visible and vociferous advocate of inflation targeting).

But the current government has actually slowed the pace of reform, and the Bank of Japan — which only recently acquired Federal Reserve-style autonomy — has adamantly refused to do anything unconventional. (When I was in Japan in December, I witnessed an argument between former B.O.J. officials and current officials of the Ministry of Finance. The former declared that it would be wrong to do anything risky; the latter reminded them, to no avail, that the current policy of running up huge debts to finance public works is already very risky.)

Of course Krugman turned out to be absolutely correct.  The fiscal stimulus never got Japan out of the liquidity trap, and it was only in 2013 that Japan finally adopted a 2% inflation target—and then prices started rising.  Krugman was very worried about Japanese debt levels when their national debt was less than 150% of GDP—now it’s 250%.  All those “bridges to nowhere” were a monumental waste of money, when a 2% inflation target back in 2000 would have been far more effective.

Later in 2000, Krugman wrote more articles on Japan, which criticized the BOJ decision to raise rates.  Again, Krugman turned out to be completely correct—Japan fell back into recession and had to cut rates again.

So when did Krugman become “Krugman”?   It seems like the turning point was around 2002, when he started advocating fiscal stimulus for the US:

Not many people realize that in some ways Japanese economic policy responded quite effectively to a sustained slump. It’s easy to make fun of the country’s enormous spending on public works — all those bridges to nowhere in particular, highways with no traffic, and so on. Without question enormous sums have been wasted. But it’s also clear that all that spending pumped money into the economy, preventing what might otherwise have been a full-fledged depression.

So what will be the U.S. equivalent? Right now we are in effect following the reverse policy: slashing domestic spending in the face of an economic slump. Some of this is taking place at the federal level; the Bush administration is nickel-and-diming public spending wherever it can, shaving a billion here, a billion there off everything from veterans’ benefits and homeland security to Medicare payments. More important, the federal government is doing nothing to help as state and local governments, their revenues savaged by recession, make deep cuts in spending on everything that isn’t urgently necessary, and many things that are.

This is a radically different Paul Krugman from the 1999-2000 version:

1.  Now Krugman is making things up—for instance suggesting that Bush had adopted a contractionary fiscal policy, when Bush’s policy was actually quite expansionary (huge tax cuts, massive increases on federal spending on education, homeland security, Medicare drug benefit, military build-up.)  This is a more ideological Krugman than the neoliberal of 2000.

2.  Krugman says it’s easy to make fun of the Japanese public works, but doesn’t tell his readers that back in 1999 he was one of those people ruthlessly mocking the Japanese public works spending:

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?

One possibility is that Krugman turned left due to “Bush derangement syndrome.” In fairness, however, you could see a similar pattern in Ben Bernanke, who was a Republican during this period.  In 1999, Bernanke was also contemptuous of the view that the BOJ was out of ammunition, but by late 2008 Bernanke was also advocating fiscal stimulus.  Indeed right about the turn of the century there was a gradually shift to the left in many places.  Regulations started ramping up in the US (i.e. Sarbanes-Oxley).  The British Labour Party abandoned their fiscal austerity, as did the Dems in the US.  So perhaps Krugman was merely a part of this gradual change in the zeitgeist.  I haven’t changed, so I’m not well placed to understand what caused so many other people to become more sympathetic to fiscal stimulus and regulation.



38 Responses to “When did Krugman change? And why?”

  1. Gravatar of E. Harding E. Harding
    7. April 2017 at 12:10

    Art Deco suggests this is when Krugman effectively retired and his wife started writing his articles for him.

  2. Gravatar of ssumner ssumner
    7. April 2017 at 12:28

    Art Deco is nuts.

  3. Gravatar of Cameron Cameron
    7. April 2017 at 12:37

    I think Bernanke just adjusted to the politics of the situation. If he had been more forceful he might have been able to frame the conversation differently, but he probably figured fiscal stimulus was a kind of insurance policy in case he was wrong or didn’t the votes for more monetary policy. Unfortunately, now the conversation has permanently been poisoned.

    Haven’t followed him closely in a while, have his blog posts suggested his views on liquidity traps have changed?

    Krugman’s criticism of Bush’s “austerity” is hilarious. The man literally could do no right in his eyes. He is part of the reason the left’s outrage isn’t taken seriously anymore.

  4. Gravatar of Scott Freelander Scott Freelander
    7. April 2017 at 12:51


    Bush was a terrible President, who left office with approval ratings in the low 30s or high 20s, as I recall. Don’t let the Trump contrast make Bush look better than he was.

    Sure, Krugman greatly exaggerated the risks of the Bush deficits, but this was an administration that started two useless wars, one of them based on faulty reasoning, which went a long way toward discrediting Washington establishment. Bush was generally in over his head and very incompetent, though he’s a genius compared to Trump.

    It’s always humorous when people want to blame liberals and/or Democrats for the actions of conservatives and/or Republicans. At least people like Charlie Sykes have the honesty and insight to realize that their decades-long attacks on Democratic legitimacy and the legitimacy of institutions in general, such as the media, courts, etc. greatly helped lead to Trump being elected. If Democrats are to blame at all, it’s for weakness in the face of the onslaught against reason.

  5. Gravatar of ssumner ssumner
    7. April 2017 at 13:34

    Scott, You said:

    “Sure, Krugman greatly exaggerated the risks of the Bush deficits”

    Krugman was suggesting that the Bush deficits were too small, not too large.

  6. Gravatar of Steve Steve
    7. April 2017 at 14:07

    Krugman himself said he was radicalized by the Bush administration, post 9/11:

    The Bush administration was obviously — yes, obviously — telling tall tales in order to promote the war it wanted: the constant insinuations of an Iraq-9/11 link, the hyping of discredited claims about a nuclear program, etc.. And the question was, should you stand up against that? Not many did — and those who did were treated as if they were crazy.

    For me and many others that was a radicalizing experience; I’ll never trust “sensible” opinion again.


  7. Gravatar of Capt. J Parker Capt. J Parker
    7. April 2017 at 14:25

    For any economist trained in the 70’s who has changed his mind about government debt and fiscal stimulus I would think that this: http://s.wsj.net/public/resources/images/OB-QC128_LongTe_K_20111013104251.jpg aught to factor into it. I’m rather sure Krugman has explicitly said that the actions of the Bush 43 administration (war and tax cuts to be paid for by social program cuts according to Krugman) led him to believe a radical opposition to the Right was needed. But, still, isn’t a debt to GDP ratio of 250% for Japan along with zero yeilds on Japanese bonds enough to change anyone’s mind about the value of fiscal stimulus? Those Japanese bridges to nowhere were basically free. I wish the long term global changes in real interest rates were talked about more along with some discussion of if and how central bank actions affect real interest rates.

  8. Gravatar of Capt. J Parker Capt. J Parker
    7. April 2017 at 14:29

    @ Steve, Hat’s off to you. That is exactly the Krugman blog post I remember but could not locate.

  9. Gravatar of Steve Steve
    7. April 2017 at 14:36

    @Capt. J Parker

    Yeah, I remembered that too although it took a bit of searching. As much as I dislike Krugman, it humanizes him realizing that he went nuts because of WMDs. After all, I went nuts in 2008 and no longer trust conventional wisdom, either.

  10. Gravatar of John John
    7. April 2017 at 15:56

    It seems the change in Bernanke’s thinking had a lot to do with what a central bank could do in theory vs practice. In theory I can depreciate my currency to nothing (ask Zimbabwe and Weimar Germany). In practice, the central banking committee has a hard time voting for trillions dollars of reserve injections (I don’t know why this is, but it seems pretty true from reading major newspapers). If QE isn’t forthcoming then fiscal stimulus is a decent second best option (although we should all recognize overall it’s much further from effectiveness than the first best option).

  11. Gravatar of flow5 flow5
    7. April 2017 at 16:00

    Paul Krugman probably still thinks the Fed’s caught in a liquidity trap. See NY Times: “The Fed Does Not Control the Money Supply”

    As rates rise during a typical policy induced business cycle (now exacerbated by remunerating IBDDs), the proportion of savings deposits (funds held beyond the income period in which received), to those balances preparatory for spending within the payment’s system, increases (broadly metastasizes).

    So money velocity falls (actually predominately savings or non-bank Vt), R-gDp falls, and the FOMC (the policy formulating arm of the Fed), falls victim to FOMC schizophrenia, do I stop? >because inflation is accelerating; or do I go? >because the economy is slowing.

    If the Fed pursues a restrictive monetary policy, interest rates tend to rise in concert. This places a damper on the creation of new money, but, paradoxically drives existing money (voluntary savings) out of circulation into stagnant commercial bank-held savings deposits (creating disequilibria / instability).

    In a twinkling, the economy begins to suffer (as evidenced by a deceleration in R-gDp during the same period), and / or with a monetary offset, subsequently generates higher levels of stagflation (drop in incomes).

    The recent rate hike by the Fed is prima facie evidence – as the FRB-ATL’s GDPNow model’s forecasts have been repeatedly revised downward (the first quarter of 2017 is just 0.6 percent on April 7). I.e., large CDs on the H.8 release increased by 16.9 percent in January.

    It’s déjà vu. There was also a dramatic contraction in credit velocity (actually confined to savings velocity, the transfer of title of non-bank assets within the commercial banking system), following the rate hike on 12/15/16 (which swallowed up R-gDp). Same for the hike on 12/17/15 (which swallowed up R-gDp).

    There is already another dramatic contraction in DD Vt following Yellen’s latest rate hike on 3/15/17 (again swallowing up R-gDp).

    The bond market has already foreseen this. Haven’t you noticed the U.S. 10yr Daily Treasury Yield Curve rates @ 2.6% on 3/14 and @ 2.38% today?


    The remuneration of IBDDs not only engenders an excess of savings over investments, but also compresses *real* rates of interest inducing secular strangulation.

    The last 3 rate hikes have now made it necessary to ease monetary policy (in the face of an acceleration in stagflation).

  12. Gravatar of Scott Freelander Scott Freelander
    7. April 2017 at 16:59


    Krugman worried about Bush deficits through at least most of the first term, predicting higher interest rates, etc. After the Democrats took control of Congress, his perspective began to shift and he began to acknowledge he was wrong about the significance of the Bush deficits.

    Remember, in the quotes above you offer from Krugman from 1999-2000, he was still a deficit scold. Bush took office shortly after.

  13. Gravatar of dtoh dtoh
    7. April 2017 at 17:12

    Krugman – Partisan hack who discarded all academic integrity to further the Democrat’s agenda.

    Bernanke – Typical academic. Good at writing and talking. Not so good at dealing with people and getting things done.

    Speaking of Presidential Derangement Syndrome…. if Trump promotes Market Monetarism will you ally yourself with MF in support of the gold standard? 🙂

  14. Gravatar of Jim Glass Jim Glass
    7. April 2017 at 17:16

    “Sure, Krugman greatly exaggerated the risks of the Bush deficits”

    Krugman was suggesting that the Bush deficits were too small, not too large.

    Oh, I don’t think so.

    Krugman 2003…

    “I’m terrified …[The Bush Adminstration] says deficits don’t matter. But we’re looking at a fiscal crisis that will drive interest rates sky-high … But what’s really scary … is the looming threat to the federal government’s solvency. That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of GDP….”


    Krugman interviewed in the Asia Times in 2005…

    If he were Obi wan-Kenobi in this particular galaxy, what would he do to extricate the US from this mess? “No more budget deficits,” he says. “We should be running surpluses.” Tax increases: “We should be getting 28% of GDP [gross domestic product] in revenue. We are only collecting 17%.”…


    Yikes, that’s a 65% tax increase! As to those surpluses, didn’t he ever hear of fiscal drag? I can give many many more examples. I kept a clip file. The Bush Tax Cuts and the deficit they created were his Public Enemy #1, relentlessly.

  15. Gravatar of Jim Glass Jim Glass
    7. April 2017 at 17:38

    When did Krugman change? It depends what change one is talking about.

    His big change into rabid political partisanship occurred immediately upon the election of Dubya and his move from Slate to the NY Times. He even wrote a blog post about it on his personal web site, saying he would never criticize a Democrat again until they showed they could win an election. (Of course when they did he didn’t. Habits become hard to break.)

    I remember it well because I was a big fan of his at Slate. There he wrote a lot of excellent econ for the lay audience, albeit with plenty of his congenital name calling. You may recall his being forced by the lawyers to actually write a public apology to Fraga. But the name calling was non-partisanly directed at professional rivals (Laura Tyson, Paul David), other liberals (Thurow, Galbraith, Greider, Reich, Dean Baker, many others), and, maybe for fun I guess, at various random public intellectuals who had nothing to do with econ (Stephen J Gould, etc). Then came Dubya.

    I was looking forward to PK’s arriving at the Times figuring that in that prestigious venue the name calling would be suppressed and the econ sharpened. But instead it was just the reverse — immediately all bash Dubya&Repubs all the the time, via one howler after another. E.g., The army gave only one bottle of water a day to soldiers in the Iraqi desert. Dubya has crookedly taken a disproportionate share of the profits of the Texas Rangers (PK thus showing he knows less than a gas station owner about how business partnerships work). And my favorite: revenue lost to the Bush tax cuts would have been more than enough to fully pay for Medicare and Social Security for 75 years (!) Laughable. (Myy fave because when I pointed it out on DeLong’s and other blogs PK got mad at me personally. Yea!). Complaints to the Times’s editors over these got them to formally state to the public that in-house op-ed writers are exempt from fact-checking rules that apply to the rest of the paper, because they just write “opinions”.

    As to PK’s change regarding deficits and debt in the USA, that occurred promptly with the election of Obama in 2008. Being that the Great Recession arrived at the same time, the change of opinion as to deficits might have been reasonable. But his former terrifying vision of accumulated debt breaking the government circa 2030 went right down his memory hole. In particular, the burden of entitlements. In 2003…

    “because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest … the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident, the fiscal train wreck, is already under way.”

    But after Obama made 90% of the Bush tax cuts made permanent (with Krugman’s endorsement) it was ‘Entitlements? What entitlements?’ Jim Hamilton called him out explicitly on this, and PK’s reply was: Future entitlements were big in the 1950s too and the economy outgrew them, things are the same now, so what’s the issue?

    One possibility is that Krugman turned left due to “Bush derangement syndrome.”

    Oh, he got Bush Derangement Syndrome for real, no doubt about it, but on the deficit and debt it turned him *sharp right* for the duration. Left on every dang thing else.

  16. Gravatar of rob rob
    7. April 2017 at 18:28

    My guess is Krugman really did get Bush derangement syndrome(I still assign his old readings from class) and has since been on the track of highly motivated reasoning. For Bernanke fiscal stimulus would have meant he would have to do fewer “unseemly” things in order to reach the target.
    Most intro textbooks still present fiscal and monetary policy as equals in the struggle for higher AD and AD management, maybe that is a place to start?

  17. Gravatar of ssumner ssumner
    7. April 2017 at 18:35

    Captain, You said:

    “Those Japanese bridges to nowhere were basically free.”

    What about opportunity cost?

    John, But it’s much harder to get Congress to vote for fiscal stimulus than it is to get the Fed to vote for QE.

    Scott, No, the quote is from 2002.

    dtoh, If Trump endorses MM, then I’ll say, “the idiot has endorsed a good monetary policy”.

    Jim, Look at the quote from 2002. He favored fiscal stimulus.

  18. Gravatar of Mc Mc
    7. April 2017 at 18:51

    7. April 2017 at 12:28

    Art Deco is nuts.”

    A child responds to a master impertinently.

  19. Gravatar of Benjamin Cole Benjamin Cole
    7. April 2017 at 18:56

    Excellent post.

    And yet there is even a larger question than Krugman’s mysterious undulations, a question regarded as “taboo,” says Adair Turner, the former Brit financial regulator:

    What is the meaning of a “national debt” if the central bank can print (digitize) money and pay off the national debt, without inflationary consequence?

    This is not theoretical. This is in fact happening in Japan.The Bank of Japan may run run out of national debt to buy within a few years.

    Soon, the Japan government will own the Japan government debt!

    Horrors! Horrors!

    The orthodox macroeconomic treatment of national debt begins to look badly outdated, even misleading, or demented.

    Of course, in the U.S. we saw the Fed buy a few trillions of government IOUs after 2008, and we barely escaped deflation.

    Western orthodox macroeconomists are loath to ponder this question of what is the meaning of national debt, and even normal people might legitimately worry about giving legislators the idea they can borrow without consequence.

    But the reality stands: The national government of Japan does not have a debt problem. It owns ever-larger fractions of the debt.

    Should not orthodox macroeconomists adopt to this reality and devise advice accordingly?

  20. Gravatar of Capt. J Parker Capt. J Parker
    7. April 2017 at 19:05

    Dr. Sumner said: “Captain, You said:

    “Those Japanese bridges to nowhere were basically free.”

    What about opportunity cost?”

    Yeah, fair criticism. But, if the resources used to build the bridges would have otherwise sat idle wouldn’t the opportunity cost be low? Or have I been reading too much Krugman?

  21. Gravatar of Benjamin Cole Benjamin Cole
    7. April 2017 at 19:07

    Also, of late Larry Summers has publicly pondered that although U.S. public spending during WWII was (in strictly macroeconomic terms) parasitic or worse, nevertheless, the economy radically expanded and living standards rose.

    Of course, Japan’s economy largely sidestepped the Great Depression thanks to helicopter drops (which were sadly wasted on military outlays and inhuman overseas occupations).

    Krugman may be influenced by Summers.

    More and more, I am seeing that ideology (left and right), or certain economic theories, may be poor guides to real world macroeconomic policies.

    Worse, some policies that may seem ideal become destructive if structural impediments are ignored.

    Macroeconomic policy, like war, has to be made accepting certain immutable facts on the ground.

    Property zoning is a sacred, deeply embedded structural impediment in the U.S. economy, fervently embraced by the financial and propertied classes.

    Macroeconomic policy must accept and adapt to that structural impediment.

  22. Gravatar of Scott Freelander Scott Freelander
    7. April 2017 at 19:43


    Yes, that’s strange. I missed the date on that, thinking I read 2000. If you look at that link from Jim Glass above dated 2003, Krugman wrote that he switched to a fixed rate mortgage, “terrified” about the prospects of rising interest rates due to deficit spending.

  23. Gravatar of flow5 flow5
    8. April 2017 at 03:58

    The term “credit crunch” was first coined during the 1966 S&L residential real-estate debacle. It was the lack of funds, rather than the cost of funds, that spawned the credit crisis of 1966. It was the 5th successive Regulation Q ceiling rate hike for exclusively the commercial banks, DFIs, since 1957 (& 1957 was the first hike since 1933). This hike ended the U.S. Golden Era in economics.

    The 5th rate hike in the DFI’s deposit ceilings was unique in that it was the first increase that permitted the DFIs, to pay higher rates on savings than S&Ls and MSBs (the non-banks, NBFIs) could competitively meet. And the thrifts, non-banks, were previously always unregulated and unrestricted with regard to pooled savings, and gov’t insured, consumer/retail type deposits (representative of BuB’s “democratization of credit”, the obverse of the elimination of usury ceilings, the five C’s of credit, & antitrust laws). Reg. Q ceilings for the non-banks were imposed beginning with the advent of the credit crunch in 1966.

    I.e., the 5 ceiling rate hikes for the DFIs caused stagflation (the word coined in 1965 by Iain Macleod) as predicted by Dr. Leland James Pritchard (Ph.D., Chicago, Economics, 1933, MS, Statistics, Syracuse), in the late 1950’s.

    See: “Commercial Bank and Financial Intermediaries: Fallacies and Policy Implications”, The Journal of Political Economy, Vol. LXVIIII, No. 5, October 1960 – L.J.P.

    See also: “Should Commercial Banks Accept Savings Deposits”, Conference on Savings and Residential Financing (1961 proceedings), United States Savings and Loan League, Chicago – L.J.P.

    See: George Selgin’s re-cap on remunerating IBDDs:

    1. IOR was implemented in October 2008 for the avowed purpose of checking bank credit expansion in response to the Fed’s creation of fresh bank reserves.
    2. In fact, IOR contributed to the fall 2008 wholesale credit crunch, most obviously by causing a dramatic decline in interbank lending. Again, this contribution was anticipated by Bernanke and others responsible for the policy.
    3. Once the rate of IOR exceeded the yield on Treasuries and other low-risk assets, as it did shortly after the program began, banks had an incentive to accumulate excess reserves instead of attempting to acquire such securities. Thus the normal process of bank balance-sheet expansion and deposit creation in response to reserve injections was short-circuited.
    4. IOR also contributed to the relative decline in risky bank lending by increasing the marginal opportunity cost of such lending. This portfolio effect of IOR on risky lending was very small relative to that of increasing regulatory burdens, including capital requirements, especially after 2008. But as at least some banks had both surplus capital and surplus reserves, capital constraints alone did not prevent IOR from also having some influence.
    5. Fed officials, including Bernanke, who would deny that IOR had the consequences I have just outlined, are at least obliged to reconcile their denials with the justifications offered for implementing the program in the first place.”

    Greenspan in the “Map and the Territory”: “the depth of a financial crisis is best characterized by the degree of collapse in the availability of short-term credit (like call money precipitated the 1907 panic). “The evaporation of short-term credits, especially trade credits, in September 2008 was global and all encompassing”. “Not only did short-term funding collapse, but customer collateral that was subject to recall fled”.

    Alan Blinder “After the Music Stopped”: “the inability to roll over short-term borrowings is the modern version of a run on the bank. Such runs more or less killed both Bear Sterns and Lehman Brothers in 2008, and almost killed Merrill Lynch, Morgan Stanley and Goldman Sachs”.

    Ben Bernanke: “BNP Paribas said that it could not determine the value of its funds because of the ‘complete evaporation of liquidity’ in the markets for those securities.”…”As in a traditional run, the outcome was that shadow banking entities (including conduits) found it increasingly difficult to obtain funding”…”financed, directly or indirectly, b wholesale funding, mostly in the form of commercial paper or repurchase agreements.”…”We faced: the growing scarcity of short-term funding”…”granting temporary exemptions from Section 23A of the Federal Reserve Act, which normally prevented them from funneling discount window credit to nonbank components of their companies”…”our goal was to increase the supply of short-term funding to the shadow banking system”.

    In other words, contagion in the form of dis-intermediation (a term only applicable to the non-banks since 1933). In other words, contrary to bad Ben, money isn’t fungible, one dollar isn’t like any other. BuB caused the GR all by himself.

    As I said: “So, now, each and every time the Fed raises the remuneration rate, it will induce non-bank dis-intermediation and money velocity will decelerate.” Aug 1, 2016. 08:38 PMLink

    We’ve now had 3 rate hikes in the Remuneration rate beginning 12/17/15. 5 rate hikes could cause a permanent economic Depression.

    – Michel de Nostredame

  24. Gravatar of ssumner ssumner
    8. April 2017 at 05:16

    Captain, You said:

    “But, if the resources used to build the bridges would have otherwise sat idle wouldn’t the opportunity cost be low? Or have I been reading too much Krugman?”

    They would not have otherwise sat idle.

    Ben, You said:

    “Also, of late Larry Summers has publicly pondered that although U.S. public spending during WWII was (in strictly macroeconomic terms) parasitic or worse, nevertheless, the economy radically expanded and living standards rose.”

    He’s wrong, living standards fell during the war.

    Scott, I guess he’s inconsistent.

  25. Gravatar of rayward rayward
    8. April 2017 at 05:31

    In 2000, China’s GDP was about $1 trillion. Today, it’s approaching $12 trillion. Not coincidentally, during this period America experienced disinvestment in both productive capital and public infrastructure. Facts changed, Krugman changed. [To be clear, I favor trade and believe it beneficial to both America and its trading partners. But with globalization, public investment is essential to offset private disinvestment.]

  26. Gravatar of Scott Freelander Scott Freelander
    8. April 2017 at 05:55

    What’s really odd to me is how any numerate person could’ve been that panicked about deficits at the time. It’s a really important, but simple fact that simple interest is paid on Treasuries, but NGDP growth is compounded. That alone means there’s much more room to run up debt than deficit scolds realize. That’s not to say we should run deficits without good reasons.

  27. Gravatar of Scott Freelander Scott Freelander
    8. April 2017 at 05:58

    In fact, a Krugman like conclusion would be to question his motives.

  28. Gravatar of Matthew D McOsker Matthew D McOsker
    8. April 2017 at 07:32

    The Bush II deficits were only about 1% of GDP by 2007. The peak was about 3.3% of GDP circa 2004.

  29. Gravatar of Jim Glass Jim Glass
    8. April 2017 at 08:15

    Jim, Look at the quote from 2002. He favored fiscal stimulus.

    OK, I will, again. In 2002 he criticizes “slashing domestic spending in the face of an economic slump”.

    Now, please, you look again at his quotes from 2003 and 2005. When he was “terrified” of “the looming threat to the federal government’s solvency” caused by the Bush deficits, and said “We should be running surpluses. We should be getting 28% of GDP in revenue. We are only collecting 17%.”

    In 2002 he may have thought we were still in a recession (although we weren’t) so sympathy for temporary fiscal stimulus might have been reasonable. His change in attitude about it compared to his earlier writing about Japan he’ll have to explain for himself.

    But the change in his attitude towards the *accumulating debt*, from *fear and horror* in 2003 until 2008 (I can give many more examples) to utter disregard in 2009 until today, is IMHO both a much bigger change intellectually and one with much bigger practical consequences. I mean, the change in attitude about fiscal stimulus was about a modest temporary boost to the economy, while his change in attitude about the accumulated debt is about what he claimed would cause the coming destruction of the economy. And of course the accumulation has accelerated greatly since 2003-2008. So *that* change really should be a the top of his “change” list, ISTM.

    One possibility is that Krugman turned left due to “Bush derangement syndrome.”

    If one grants the pathological nature of Krugman’s BDS it explains his damning Dubya whatever he did, both his not running deficits big enough in 2002 and running up economy-destroying debt levels in 2003.

    Hey, isn’t the test of a first-rate intelligence the ability to hold two opposing ideas in mind at the same time?

  30. Gravatar of flow5 flow5
    8. April 2017 at 08:19

    @ Scott Freelander:

    “It’s a really important, but simple fact that simple interest is paid on Treasuries, but NGDP growth is compounded”

    It should be recalled that the charges on debt are related to a cumulative figure; and since the multiplier effects of debt expansion on income, the ingredient from which the charges must inevitably be paid, is a non-cumulative figure, it would seem that the time will inevitably arrive when further debt expansion is no longer a practical or possible expedient, either to provide full employment or to keep debt charges with tolerable limits.

  31. Gravatar of Scott Freelander Scott Freelander
    8. April 2017 at 09:15


    Of course there are limits to the debt a government can run up. My point is that it seems common even for many economists to vastly underestimate how much debt developed countries can tolerate.

  32. Gravatar of Jim Glass Jim Glass
    8. April 2017 at 09:51

    Here’s one for your clip file, Professor. Krugman 2001…

    “Mr. Koizumi is right about one thing: Japan cannot go on like this. Swelling public debt will eventually threaten the government’s solvency; the festering financial problems of the banks will soon require a government bailout that will swell that debt even further. Something must be done…

    “There is an answer to this dilemma, one that has become almost orthodoxy among economists who have tried to think seriously about Japan’s plight. This answer involves unconventional monetary expansion, with the Bank of Japan buying dollars, euros and long-term government bonds; it also involves accepting and indeed promoting mild inflation and a weak yen.”


    Pro QE, anti-accumulating debt which will ultimately threaten government solvency. Even closer to 2002.

    There’s a lot of fun Krugmania I’d forgotten in the early columns. Here’s a list of all in one place compiled by a fan…


  33. Gravatar of ssumner ssumner
    8. April 2017 at 10:00

    Rayward, So you are saying China should be our model? Seriously? Have you ever been to China?

    The question of whether we need more public investment is completely unrelated to the question of whether or not we need an expansionary fiscal policy.

    Matthew, Yes, but when Bush took office we were running a large surplus. So there was a pretty large shift toward deficit spending. Krugman talks like Bush’s fiscal policy was contractionary.

    Jim, Yes, he seems very inconsistent. Here’s what he said on October 4, 2002:

    “The answer is that we should have a sensible plan for fiscal stimulus — one that encourages spending now, to bridge the gap until business investment revives. Some of the elements of such a plan are obvious, and were described by Jeff Madrick in yesterday’s Times. First, extend unemployment benefits, which are considerably less generous now than in the last recession; this will do double duty, helping some of the neediest while putting money into the hands of people who are likely to spend it. Second, provide aid to the states, which are in increasingly desperate fiscal straits. This will also do double duty, preventing harsh cuts in public services, with medical care for the poor the most likely target, at the same time that it boosts demand.

    If these elements don’t add up to a large enough sum — I agree with Mr. Madrick that $100 billion over the next year is a good target — why not have another rebate, this time going to everyone who pays payroll taxes?”

  34. Gravatar of Christian List Christian List
    8. April 2017 at 19:08

    Krugman got Bush derangement syndrome indeed. He got it so much that it miraculously changed the laws of economics for him. Not to say he became an inconsistent crazy person.

    I know a market monetarist who got Trump derangement syndrome. Let’s hope something similar does not happen to him. It would be a pity.

  35. Gravatar of rayward rayward
    9. April 2017 at 06:23

    No, I didn’t say China should be our model. What I’m saying is that with globalization, investment in productive capital shifted from America to (for example) China. And it’s not a coincidence that public investment in infrastructure declined as well. Monetary stimulus alone won’t induce owners of capital to invest in productive capital (or to support investment in infrastructure) when the rate of return (r) is depressed (as it has been for much of the past 20 years) and when speculation in real estate and financial assets is viewed as the better alternative. Whether globalization is the “cause” I don’t know. It’s likely a combination of factors, including globalization, an aging population, and (drum roll) a high level of inequality. James Tobin focused on the declining r, it’s causes, and policies that might affect it. Of course, Tobin is dead, and his approach isn’t much appreciated at this blog. And neither is Krugman’s. As for the change in Krugman’s views since 2000, how could anybody’s views not change given the enormous shift in investment and economic output as the result of globalization. Shifting over $10 trillion in output from one place to another has consequences to both the place where it was shifted and the place from which it was shifted.

  36. Gravatar of Jose Jose
    10. April 2017 at 11:16

    Off topic: Prof. Sumner, have you seen this? I didn’t check your previous posts either here or over on Econlog to check …


    Does it look like a market monetarist idea to you ?

  37. Gravatar of ssumner ssumner
    10. April 2017 at 12:45

    Jose, Yes, I posted on that.

  38. Gravatar of Hugh D’Andrade Hugh D'Andrade
    10. April 2017 at 16:29

    I think that it is worth noting how much time and how many brain cells I have made available for other pursuits by no longer reading any thing written by or about Paul Krugman.

Leave a Reply