Matt Yglesias comments on Paul Krugman throwing in the towel:
Paul Krugman says he used to consider himself a “free market Keynesian” but doesn’t anymore after watching the failure in practice of unconventional monetary policy or discretionary fiscal policy to stabilize the macroeconomy.
I also find this disheartening, but I don’t really understand where it leaves us. Krugman says “the political economy of policy turns out to make an effective fiscal response to depression very difficult.” I agree. And he says “the Fed hasn’t ever been willing, or felt that it had sufficient political room, to do that experiment.” I also agree. So then he concludes:
At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. And I don’t just mean banking regulation; as the authors of the linked paper say, the logic of this argument calls for policies that discourage leverage in general, capital controls to limit foreign borrowing, and more.
Those sound like good ideas to me. But “sharply limit borrowing during good economics times” doesn’t strike me as any less politically challenging than “use fiscal and monetary policy to lift the economy during bad times.”
I applaud Krugman for keeping an open mind and rethinking his assumptions. I was too optimistic about the willingness of the Fed to stabilize NGDP. But I’ve drawn different conclusions from my failure.
When Krugman argued for fiscal stimulus because we weren’t likely to do monetary stimulus, I suggested that that was how banana republics behave. Going to a third best policy is even worse. In addition to the political barriers mentioned by Matt, there are also more and more unforeseen side effects when you go to second, third and fourth best policies. That’s not to say everything Krugman proposes is wrong. Maybe higher capital requirements are needed, but don’t do them as a substitute for effective stabilization policy, it will never work.
I don’t like policy fatalism for several reasons. First, we should demand the best. If we insist on it over and over again then eventually we will win. I was taught that free trade is a pipe dream because the public and the special interests oppose it, and yet it’s becoming increasingly clear that the world is moving toward once giant free trade zone. I was taught that high inflation was inevitable in a modern economy because the public would never put up with the high unemployment necessary to bring it down. Then the economics profession reached a consensus on flexible inflation targeting, and we solved the high inflation problem. Now the profession is gradually moving in the direction of a NGDP targeting consensus, why in the world give up now?
And remember those who assured us the Japanese would never adopt a 2% inflation target, because their political system was dominated by old savers? Anyone follow the recent election in Japan?
So is there a good pragmatism, as the title suggests? I think so. Here’s a discussion of the problems in getting high speed rail built in the US, as part of an article on the new superfast tube transport idea:
A good example is the push by the Obama administration to develop high-speed rail around the country. Five years after President Barack Obama was sworn in and promised to put high-speed train service on the fast track, most of the proposals are far from reality.
Why?
Government bureaucracy, concerns about costs and the fact some elected leaders are openly fighting to stop the development of high-speed rail.
I have no idea whether tube transport will work, but I’m convinced of the following facts:
1. The US is relatively bad at building that sort of thing. Plus it’s very risky.
2. Other countries like France and Germany and Japan and China are much better at this sort of thing. We should let them test the idea first. If it works overseas then build it here. Hell, if it works the American public will demand we build it here.
3. They’ve been free-riding on our drug research, it’s time we free rode on their transport research.
That sort of pragmatism is sensible, recognizing what you are good at and what you are bad at. But there’s no reason not to demand the Fed adopt the right monetary policy. None at all. We should never be defeatist on that issue.
PS. I’m old enough to remember when stores had those really neat pneumonic tubes.
PPS. I predict that at some point in the next decade Ben Bernanke will say that NGDP targeting deserves serious consideration.
PPPS. As long as Elizabeth Warren is advocating Paul Volcker for Fed chairman, liberal intellectuals as a group have failed to send a loud and clear message on the importance of monetary stimulus.
PPPPS Are there areas where Krugman would argue that the failure of the government to do the right thing implies the need for a more market-oriented approach? (I was inspired here by Bryan Caplan’s recent judo move on “nudging.”)