Edited on Jan. 16 for clarity, to incorporate Wren-Lewis and to fix a very unfortunate typo. Krugman is down with “infrastructure”, not “stimulus.”
The recent shift of fiscal policy preference among some liberals — particularly Paul Krugman — seems awfully conveniently timed to the political cycle and has inevitably raised accusations of political bias.
For example, a blogger friend up in Canada said it was “amusing” to see “Democrat” economists changing their tune now that a Republican is in the White House. And yesterday a contact on Twitter told me that he could not see Krugman as anything more than a partisan hack, given how quickly he changed his views on fiscal policy.
There are better examples, obviously. I am relating my personal experience here. I am sure you can come up with your own cases of would-be “centrists” confusing the business cycle for politics.
The Krugthulu could easily have known by the summer, Mr. Chairman.
In this post, I would like to defend Krugman on the timing, and just point out again that I don’t think he has swung hard enough – at least until very recently, i.e. yesterday.
And then I would like to make a broader point about how it is probably more important – in your analysis – to actually be non-partisan than to make a show of seeming so. There is nothing worse than a fake-balance centrist congratulating himself for saying the world is shaped like an egg.
My own view about the wisdom of “fiscal” stimulus shifted with the textbook, which is more to say I lack unique insight than to brag about the timing. The timing could easily have been off.
As soon as Fed tightening became a practically relevant possibility, a little over two years ago, I figured the US had escaped the logic of liquidity trap and that any fiscal tightening would be pointless, because it would just be offset by Fed tightening: the prospect of it in the short term, and the delivery of it in the medium term.
My only attempt at a unique insight there was to insist that the Fed does not actually have to come off the zero bound for the logic of liquidity trap to disappear. If forward rates are sufficiently sensitive to the prospect of coming off zero, and if that prospect itself is real, then that is probably enough.
Also, with the unemployment rate much reduced and falling on its own, the hair-on-fire need to speed demand growth seemed to have dissipated. Right or wrong, that was my take, two years ahead of the election. If you think all this backward looking stuff about who said what when tedious, then you can stop here. My work here is done!
But I have 2 followers on Twitter, compared with Krugman’s 2.3 million. So it seems like people are more interested in the evolution of his thoughts on this issue. It seems to many observers as though Krugman was perfectly fine with fiscal stimulus right up until Hillary lost and then suddenly discovered the case for fiscal rectitude.
I think that perception is mostly wrong, although I have to concede that Krugman used some unfortunate turns of phrase along the way. Plus he was a bit too slow, too interested in “subtle” arguments, as discussed in this post a couple days ago.
But first to the defense. Tke a look at 6:20 in this video showing Krugman being interviewed by Bloomberg last August. In this video, he expressed pretty much exactly the same view I criticized him for having as recently as three days ago. That is, the case for fiscal policy is still there, although it is now “subtle”, less urgent and relies on a precautionary motive.
I think that subtlety argument is unconvincing, as I argued a couple days ago, but it was held well before the election and then after it. So the idea that there has been some sort of politically-motivated whiplash or “hackery” here seems unconvincing, to me. Maybe somebody can come up with the missing 18 minutes from somewhere else. Seriously, I don’t claim this is a thorough review.
On the other hand, I can see that Krugman did not do himself any favors with this passage from a NYT op-ed also in August, unfortunately titled Time to Borrow. After making the case for a real (not Trumpian) infrastructure spending program he raises a question:
How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing.
I am going to call that an analytical slip, which – yeah – may have arisen out of Krugman’s frustration with partisan resistance to what I would call a sensible case for fiscal stimulus that might have been made any time between, say, 2009 and 2013 or 2014. The slip is that there is now a case for infrastructure spending, which is separate from the case for fiscal stimulus, which is quite weak.
But come on, aren’t we arguing about pin-dancing angels here? There is a political – or really, legislative – aspect to all of this. You do not have to be a “hack” to recognize it. Being a little generous, reflecting my own bias, I would say Krugman wants to do an infrastructure spending program and is not worried about the financing implications. If so, I agree. I would take the pointless, suboptimal “stimulus” to get the infrastructure. (A separate question is whether they are really bundled that way. Perhaps not.)
In fairness, though, I am having trouble keeping track of Krugman’s views on fiscal policy because they seem to be evolving as I type. His current view, expressed yesterday in another NY Times Op-Ed piece, was pretty much in line with the view I got to two years ago, although I would put more emphasis on the logic of liquidity trap than on full employment per se.
In his seemingly-just-updated thinking, there is no reference to that incoherent “precautionary” motive that requires “subtlety” to see. And he worries, without being apocalyptic about it, that we might want to concern ourselves with the rising debt if only because it chews up fiscal capacity for when we may need it. I am not sure Krugman is right about this, but I am sure I agree and I am sure it is a slight change from the view he expressed just three days ago. So there is that.
Man, people sure hold liberals to high standards on these issues. Is it possible the Republican side might be politically motivated on this issue? Their timing is not just slightly off, but totally backwards to economic conditions.
And this brings me to my larger point, which I can express more quickly, because it is an opinion and does not require documentation.
I was struck by my Twitter friend’s reference to Krugman leaving himself “open to” the charge of partisan hackery. Maybe the choice of words there is casual and I am reading too much in, but my friend did not say that Krugman actually is a partisan hack. Rather, he expressed concern about how Krugman might appear to people other than us non-partisan sophisticates who rise so far above it all.
That provokes two thoughts. First, FWIW I have no interest in being a non-partisan sophisticate who rises so far above it all. In my view, if Trump does not scare the hell out of you, then you are not paying attention. I want Trump stopped and I will do what little I can to see that happen. It is just that I don’t think this partisan bias needs to affect my view of what shape the world is: roughly spherical and flattened at the poles. You know, I can do two things at once, and so can you.
Second, we ought not spend so much time worrying about how we appear on this issue. On the standard paleo-Keynesian textbook interpretation, the case for fiscal policy was strong roughly about when Obama came into office and weakened sometime before he left office. It would be odd — and actually political — to pretend otherwise simply to avoid the risk of appearing partisan to people who are not willing to consider the merits of the argument.
Which brings me to you, dear reader. Are you trying to figure out the world and honestly confronting efforts to describe it? Or are you more interested in seeming to rise about it all, even as you so transparently don’t?
Simon Wren-Lewis’s View
I see that Simon-Wren Lewis shares my view that it is important to recognize the Fed as the last actor here. The Fed has an implicit target for (roughly) nominal demand growth, and if “fiscal stimulus” were to incline demand growth to quicken, then the Fed would just offset it.
In his post, Wren-Lewis is responding specifically to the argument that demand stimulus per se might bring forth an “endogenous” rise of supply and therefore have neutral implications for the Fed. But his point about the Fed being the last mover seems generalizable — and very much on point:
Even if this argument is plausible, and I think it is, it would still be irrelevant if the Fed didn’t make any allowance for it. They would still believe that tax cuts would raise demand and inflation, and so they would raise interest rates and crowd out any increase in demand. Indeed, if the Fed believed this ‘endogenous supply’ argument, they surely wouldn’t have raised rates in 2016.
To repeat, then, the doves who want more aggregate demand growth should probably be addressing their arguments to the Fed. Given the current posture of the Fed, any fiscal stimulus in 2017 or 2018 would just be systematically offset by rates policy, meaning it would have no predictable effect on growth or even inflation and would lead only to a temporary rise of interest rates.
Later, come the next recession, we might find ourselves right back at the zero bound, and with reduced fiscal capacity, not to mention what may be another poor timed fiscal tightening in train.
This is a bit off topic, but I cannot resist. One thing I like about Wren-Lewis’s argument here is that he imagines the step that comes after the fiscal stimulus presumably “works” at lifting (prospective) aggregate demand. To repeat, it is just reversed out by the Fed.
I think he could benefit from applying this same forward thinking to this stubborn faith in h money. Once the money financed fiscal expansion “works”, the central bank almost certainly reneges on its side of the bargain, meaning the original fiscal expansion will turn out not to have been money financed. Central banks can think a few steps ahead, which is why they would never go for this, at least in the US. But that is a separate discussion.
Ken Rogoff’s View
Neither Krugman, nor Wren-Lewis nor I spend much time worrying about US fiscal capacity here. The issue is much about getting the timing of fiscal stimulus right. In my view, poor timed concerns about fiscal capacity could be an issue, as they were in 2010 and 2011, but that is slightly separate.
Still, I tend to share Rogoff’s view that US fiscal capacity is high, but not unlimited. Rogoff hints at that view in a post whose main point is actually to make the case for lengthening that average maturity of the federal debt. I am with Delong in viewing such debt management efforts as counterproductive — or pointless, as I would prefer to have it. But I like what Rogoff mentions in passing here.
Specifically, Rogoff dismisses as quackery the idea that there is no upper limit to the amount of public sector debt that the US can carry. He is not clear on who the quacks are expressing that view, but I find that the MMT crowd sometimes comes dangerously close to qualifying. In my view the MMT guys did great service by pointing out — in real time, when it mattered — that agitation for fiscal austerity after 2010 was ill-timed, stupid and completely unnecessary. So good for them! But it does not follow from this that fiscal policy need never concern itself with the public sector budget constraint. That is a complicated issue that probably deserves its own post. For now, I would just say that in my opinion the argument is not mostly about fiscal capacity, but I would not dismiss that concern as irrelevant in all cases. More on that later.