Krguman has been the most outspoken supporter of the stimulus package among economists in academia, sometimes going as far as saying that the already enormous price tag will fall short of what is needed to achieve full employment. While Keynesians such as Krugman use several different arguments to justify an increase in government spending, Krugman leans exclusively on the liquidity trap.
The liquidity trap is a theoretical situation where the Fed is handcuffed because interest rates are approaching zero. Besides the recession today in America, the most famous example of this phenomenon is Japan's sluggish economy since the early 1990s.
Author economists have argued that the liquidity trap is irrelevant and a red-herring. Scott Sumner, for example, has argued that the problem is a deflation that resulted from a decrease in the speed each individual dollar moves across the economy (agreeing with Krugman) and that the only thing we need to do is to print more money (disagreeing with Krugman). Technically speaking, he argues that the Fed should target a set increase in nominal gross domestic product, which will automatically neutralize deflationary pressure. For Sumner, the interest rates are an incidental byproduct of the traditional methods of monetary policy, not the driving forces of the recession.
Sumner has received a great deal of press with the growing popularity of his own blog, The Money Illusion. Krugman, this Friday, has seemingly finally acknowledge the existence of Sumner's argument, to which he responds with more boilerplate emphasis on interest rates that doesn't actually discuss Sumner's (or anyone else's) rationale for the dictum, PRINT MORE MONEY.
He concludes with an offhand remark that the case for the fiscal stimulus is "really clear" and a link to another blog post. Okay, I'm interested in seeing a concise justification telling me why a fiscal stimulus is the only option... I click the link. And what do we get? A quick blog post mentioning a fully worked out New Keynesian model of the economy, one which Krugman acknowledges "was written in a hurry, so it’s surely incomprehensible to readers who don’t know the New Keynesian Economics literature, and probably incomprehensible even to those who do." He then restates the boilerplate, that "when monetary policy is up against the zero bound, the optimal fiscal policy is to expand government purchases enough to maintain full employment."
I clicked through the link to the paper and can say will full certainty that less than one half or one percent of Krugman's readership would understand it. I'm a first year PhD student studying the methods Krugman is using, and I have to stare at it for quite a bit to understand the model's assumptions. And this is the "really clear" justification for the fiscal stimulus? I mean, really? Krugman has been writing articles arguing in favor of a stimulus for more than a year, and what he chooses to provide as an intuitive response to someone like Sumner is incomprehensible model building? What does he expect from someone actually willing to follow him down his rabbit hole of hyperlinks? It's almost as if he's cognizant that as emperor, he has no clothes, and needs to throw complicated math at the masses (which is "really clear") to distract them from seeing that.
Even if we lived in a world where everyone has a strong grasp of control theory and differential equations and could understand the gist of the model, the model itself means nothing in this context. The purpose of models is to describe, and to describe they need to make assumptions. But different assumptions are exactly why someone like Sumner disagrees with Krugman. Krugman makes the most classic and worst mistake economists have a tendency of making, which is to assume what you are proving in order to prove it.
When Krugman pulls this type of stuff, he is no longer an economist. He's an ideologue and a propagandist. George Soros coined the snarky term "free market fundamentalism" to portray those arguing against government as holding a religious belief in favor of markets in the face of mounting evidence. While occasionally this may hold water for certain elements of the free market crowd, Krugman's harm as a propagandist far outweigh the harm caused by mediocre financial advice. He deserves the label "fiscal fundamentalist" until he begins to discuss criticisms in a less dishonest manner.
Comments