Paul Krugman must feel a need to churn out blog posts at a very fast rate (I know the feeling.) Most are excellent. But his newest post is just appallingly bad. It starts off on solid ground, criticizing Martin Feldstein’s views on monetary policy. Krugman’s right that Feldstein has been too concerned about inflation, and that his recent comments on IOR are in conflict with the conservative position that QE makes inflation a big risk. But then Krugman goes completely off the rails:
Even if this were right, wouldn’t it suggest that the Fed’s expansion poses no inflationary risk? I mean, if all that alleged pressure can be completely contained with a 1/4 percent interest rate, how big a problem can it be?
But it’s not right, as Noah shows logically; and of course the example of Japan, which did massive QE without paying interest on reserves, and saw nothing happen, reinforces the point.
I can forgive a young academic like Smith for making a bonehead argument that IOR can’t matter much because it only raises nominal borrowing costs by 1/4% (as if the impact on inflation and NGDP expectations don’t matter) but Nobel Prize-winning Paul Krugman? There are very few things in monetary economics that can be shown “logically,” and Smith did not produce one of them.
But since Krugman brought up logic, let’s apply some logic to the rest of his post:
And let me admit that I’m especially exasperated — actually, about the fiscal as well as monetary arguments — because I went over all this ground fifteen years ago.
Look, please, at my Brookings Paper on the liquidity trap (pdf), especially pp. 155-159. (Those are pages in the volume — the paper isn’t that long). You’ll find me explaining that once you’re up against the zero lower bound:
1. Changes in government spending are still effective, with a multiplier of 1, even with full Ricardian equivalence.
The problem with these multiplier estimates is that they assume that monetary policy is ineffective at the zero bound, and hence no monetary offset will occur. Inflation targeting central banks will no longer target inflation. But if that’s true THEN WHY THE HECK IS KRUGMAN COMPLAINING ABOUT TAPERING?
I’m sure that his defenders will dig up excuses. ”He said QE itself doesn’t matter, but perhaps is a signal of future policy actions that do matter.” OK, I’ll buy that (although I think QE does matter directly to at least a small extent.) That still leaves us with the question of why he’s so opposed to tapering. If he’s really opposed to the signal, then he must think that signals matter. In that case why not assume that central banks keep targeting inflation at 2%, even at the zero bound, albeit using signals instead of current changes in the base or fed funds target. If the Fed is tapering, then aren’t they pleased with the likely future path of inflation? Krugman and I agree they are wrong, but it’s what they think that drives policy.
For 5 years Krugman’s tried to have it both ways. He needs to make up his mind. Does money matter, or doesn’t it? Why does Krugman suggest that Summers is OK on monetary policy, when Krugman thinks money is too tight and Summers doesn’t? And while he’s at it, please explain why the severe austerity in 2013 led to a speed up of job growth to over 200,000/month, instead of the sharp slowdown predicted by the multiplier models. Monetary offset? Did the US do better than the eurozone because Bernanke’s so-so Fed is better than the appalling inept ECB? I’d say so.
Debating the conservative inflationistas is like shooting ducks in a barrel for a brilliant economist like Krugman. He can do better. It’s time for a serious discussion of monetary offset.
PS. Yes, the title is a weird sort of joke. I hope at least Ken Rogoff finds it funny.
HT: Travis V