The University of California Succession
John Taylor Asks: "You Disapprove of My Methods?" But I See No Method at All Here...

Paul Krugman on How Tight Money Deserves Better Advocates

Paul Krugman:

The Monetary Debate: Enter Chewbacca: The debate over monetary policy has grown increasingly surreal…. Initially, it was… straightforward… [as] monetary hawks like Allan Meltzer and Martin Feldstein that quantitative easing would lead to a major acceleration of inflation. If that inflation had happened, I like to imagine that doves like me would have conceded that we got it wrong, and reconsidered our position. But the inflationary explosion didn’t happen. So, did the hawks reconsider? No, they just came up with new reasons for the same policy position… it’s about financial stability. Yeah, that’s the ticket!

OK, I think this represents bad logic--do we really feel that the real economy must suffer to control the irrational exuberance of Wall Street traders?… But it turns out that even this wasn’t the end of the story…. John Taylor, at least--and I believe he’s not alone--has gone full Chewbacca defense…. My quick summary:

  • Current monetary policy is just like in the 1970s, except for the lack of inflation thing.
  • It’s completely ineffective, which means that we must stop it immediately, or else this ineffectual policy will somehow have vastly negative effects on something or other (not clear what).
  • But the trouble is that people think stopping it would be too costly, whereas in fact it would have no cost, as illustrated by the really bad things that just happened when the Fed indicated that it might indeed stop the policy.

Also, the sluggishness of the recovery somehow proves that money has been too loose.

I have to admit that at this point the arguments against quantitative easing have become unanswerable--because they’ve become incomprehensible, and there’s nothing to answer.

Paul is right. There is absolutely nothing to answer. John Taylor:

Once Again, the Fed Shies Away From the Exit Door - I warned on these pages in September 2010 about the dangers of "another large dose of quantitative easing" that would raise "more uncertainty about how it will ever be unwound."… The turbulent reaction in the markets showed that the predicted dangers from unwinding would be real. The Fed has justified its policies as a means of helping the economy recover. Yet economic growth has come in at less than half what the Fed predicted with all its unprecedented interventions…. Some at the Fed blame other factors… the latest excuse being cuts in state and local government purchases. But those cuts are the result not the cause of the weak economy as tax revenues have slowed.

A growing number of economists, former central bankers and senior government officials--including Martin Feldstein, Paul Volcker, Allan Meltzer, Raghu Rajan, David Malpass and Peter Fisher--have now concluded that the Fed's policies are not working…. Meanwhile, the global monetary system is starting to fracture…. The Bank of Japan's recent move toward a policy of massive quantitative easing is a good example…. Other governments and central banks have imposed capital controls…. But capital controls interfere with firms' investment decisions and cause instability…. With so many voices rising in objection, some might assume that it will be just a short time until the Fed changes course. Unfortunately, this assumption is unwarranted….

In 1968, Milton Friedman explained the folly of the view that permanently lower unemployment could be achieved through easier monetary policy…. It was not until Paul Volcker became chairman of the Federal Reserve in August 1979 that the Fed's excessively easy monetary policy came to an end. Mr. Volcker's resolve was buttressed by new economic models based on rational expectations and price rigidities…. There's a parallel with today. More policy makers and economists are coming to realize that the Fed's unconventional monetary policy is not working. Yet there is also a sense that unwinding is too costly right now…. When Mr. Bernanke mentioned that quantitative easing—today's version of the easy money of the 1970s--will taper off, the market reacted negatively. Many commentators and pundits claimed that tapering will adversely affect the economy and needs to be delayed.

I would note that the same is true of the arguments against more expansionary fiscal policy right now, as exemplified by Michael Kinsley:

Austerians really, sincerely want what’s best for America and the world, and really believe that theirs is the better path than Krugman’s…. Paul Krugman takes credit for good economic news whenever it happens…. He has been, in his own self-estimate, a lone, ignored voice for reason crying out in an unreasoning universe…. If Paul Krugman wants to get into a contest about who has spent more time in a comfortable, air-conditioned office dreaming up new ways for the government to spend someone else’s money on programs to help a third party, I’m pretty sure I would win that one… (an Atlantic blogger, who thinks he’s going to live forever, had the bad manners to point out that I’m over 60)…. I assume from the way he writes that he is out there most Sunday mornings painting poor people’s houses, serving up soup and making sandwiches. And I congratulate him for it…. It’s true, as Krugman obviously knows well, that if you’re considered a Washington “insider,” you can make a handsome living giving speeches to trade organizations or the clients of some investment bank at a fancy resort. Mix in some consulting (aka lobbying) and you’ve got yourself a nice lifestyle. But his implicit charge—that such joys are reserved for austerians—is wildly off the mark. What does he himself get for a speech? (What do I get? I don’t do paid speeches. But I think there’s nothing wrong with them.)…

In Greece, there has been a "public health disaster" because of a 40 percent reduction in medical spending…. By contrast in Iceland, according to the authors, they held a couple of votes about how to spend IMF bailout money. "Icelanders voted overwhelmingly to pay off foreign creditors gradually, rather than all at once through austerity." That is one of the least remarkable poll results of all time. But Iceland is better off, they say…. [Austerians] remember the lessons of Paul Volcker and the Great Stagflation of the late 1970s. “Stimulus” is strong medicine—an addictive drug—and you don’t give the patient more than you absolutely have to…. Disputes in academia are especially vicious because the stakes are so small. The stakes in the austerity debate… get smaller and smaller…. Krugman sometimes writes as if, right or wrong, his view is the courageous one…. The really tough message--once again, right or wrong--is the one the austerians have to deliver, which is that the party is over…. There may be a Snidely Whiplash out there somewhere who is willing to take a recession if that’s what is required to rip apart the social safety net…. We have to pay a price for past sins, and the longer we put it off, the higher the price will be. And future sufferers are not necessarily different people than the past and present sinners…. Austerians deserve credit: They at least are talking about the spinach, while the Krugmanites are only talking about dessert.

Nothing to answer here either…