It’s 10 days old and continues to receive attention, so now it’s my turn.
Mr. Krugman is at it again, commenting on a recent presentation by Larry Summers at the IMF Research Conference. Summer’s attention-grabbing and provocative conclusion is that the U.S. has basically been in a secular stagnation since the 1980s. The source of stagnation could be demographics, a decline in innovation or something else – but the key point is that bubbles have become necessary in order for the economy to grow.
Krugman, as usual, is careful to talk with caveats and in measured language, but it’s clear that he finds much merit in the position, ultimately concluding “What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.”
But let’s dig in to some of the commentary before we get there. For starters, Krugman the Statist implies that government spending is better than private spending. Specifically, he notes that the Keynes' hypothetical of burying currency in holes for the private sector to dig up, or Krugman’s notion of preparing for a fake alien invasion, are both the types of massive government spending that the economy needs right now – because spending is the priority and “unproductive spending is still better than nothing”. And the same logic applies to the private sector as well, at least sort of: ”Private spending that is wholly or partially wasteful is also a good thing, unless it somehow stores up trouble for the future. That last bit is an important qualification.” Huh? Is he really suggesting that the risk only lies with the private sector when the mandate is just to spend? I don't really think the facts support that, but it sure does tell us a lot about the mindset behind the Krugman schtick, and why he often supports programs that take control away from individuals and centralizes it in Washington.
Another area where his position just glosses over the facts is in arguing that with all the bubbles since the S&L crisis, there really has been no inflation. And to agree you basically have to ignore financial assets and the size of government or the persistent instability in the face of a “Great Moderation”. CPI doesn’t capture any of those things, of course – and it also ignores food and energy prices as well. But, by all means, continue with your hedonics and substitution, forget about wage stagnation, and pretend that people can afford just as much, and you still end up with a CPI (bogus as it may be) that is more than 2.5 times higher than it was in the late 80s.
Krugman also says the problem is not loose money and low rates. If anything, if Summers is right, the economy has been trying to get into a liquidity trap for a long time, and but-for high household spending and increasing debt, things would probably look much worse. I find it a bit misleading then to ignore the shift from a gold standard to an unbacked currency, and the resulting spike in debt levels since then, with an attending decrease in the bang that you get from each incremental dollar of debt, and still to conclude that monetary policy is not related here.
Anyway, to wrap this up, Krugman offers some ideas for how to handle this new reality. Like paying negative interest rates on deposits, pushing inflation much higher, and worrying less about financial regulation since we really need to encourage bubbles. Some of which we’ve heard before, maybe once or twice. And which I’m sure will all turn out wonderfully. After all, Nassim Nicholas Taleb is banking on it.
