From JohnLeemk

by on June 4, 2012 at 12:37 pm in Economics | Permalink

It’s incredibly frustrating. The political and policy world falls into two camps:

Those who believe no stimulus is necessary, everything is supply-side.
Those who believe stimulus is necessary but only fiscal stimulus can or should supply it.

It’s like people completely forgot the existence of Milton Friedman, and decided to revert to the stupidest possible version of New Keynesianism, where interest rates are the only lever of monetary policy and the printing press is something that only functions when rates are above zero.

I feel like to both the centre left and the right, Milton Friedman is too heretical now — too right-wing for the left obviously and too left-wing for the right. Consequently, everything about monetarism has been stripped out of the public consciousness and we are left with vulgar Keynesianism and vulgar Austrianism.

We truly live in a Dark Age of economics.

That was a comment from Scott Sumner’s blog, passed along to me by David Levey.

Morgan Warstler June 4, 2012 at 1:09 pm

just until Nov. 2012

Saturos June 4, 2012 at 3:16 pm

Keep hoping, Morgan.

Turing Test June 4, 2012 at 1:10 pm

Wasn’t monetarism falsified by the experience of the UK economy in the 1980s?

Also, isn’t the real problem here not any individual macro-economic theory in particular but rather inability of macro-economics as a whole to make testable or falsifiable predictions about the economy?

Saturos June 4, 2012 at 3:11 pm

You mean testable, falsifiable predictions like: Permanent increases in the money supply increase nominal income? Free trade raises economic growth? Debt and taxes are equivalent ways of financing government expenditures?

There is a lot more to monetarism than Milton Friedman’s k% rule.

BTW, what Scott Sumner (and Tyler, sort of) advocates is called “Market Monetarism”:

david June 5, 2012 at 12:37 am

FYI a monetarist outlook needs neither the free trade-growth nor Ricardian Equivalence hypotheses to hold.

joshua June 4, 2012 at 1:12 pm

Link seems to be missing, here it is:

Tyler Healey June 4, 2012 at 1:23 pm

If the federal government would simply institute a full suspension of the payroll tax, the economy would be fine again in no time.

It’s quite simple, really: If the federal government takes too much money out of people’s paychecks, the economy tanks.

charlie June 4, 2012 at 2:48 pm

Please tell that to the Austrians. And Germans.


A Greek taxpayer

Thor June 4, 2012 at 7:24 pm

There are Greek tax-payers?

appreciatore of great comedia June 5, 2012 at 5:19 am

Ha ha ha ho ho ha ha ho ha heh ha ha ha heh heh Ha ha ha ho ho ha ha ho ha heh ha ha ha heh heh Ha ha ha ho ho ha ha ho ha heh ha ha ha heh heh Ha ha ha ho ho ha ha ho ha heh ha ha ha heh heh Ha ha ha ho ho ha ha ho ha heh ha ha ha heh heh Ha ha ha ho ho ha ha ho ha heh ha ha ha heh heh

TallDave June 5, 2012 at 10:55 am

The Austrians would applaud, as long as you cut spending accordingly.

The Germans have already written you off. Sorry.

Bryan Caplan June 4, 2012 at 1:25 pm

Why say “the stupidest possible version of New Keynesianism”? Wouldn’t “the stupidest possible version of *Old* Keynesianism” be the better target? Or to use my preferred term, “Dinosaur Keynesianism.”

Tyler Cowen June 4, 2012 at 1:30 pm

His words, not mine, I would not have put it as he did…

Saturos June 4, 2012 at 2:14 pm

You would think that *New* Keynesians wouldn’t be such Dinosaurs. And then you read something like this:

The stupidity of these people is despite being avowedly not Old Keynesian. And interest-rate centrism is something that plagues all of Keynesianism, which is just a subset of Neo-Wicksellianism – something which Scott knows only all too well:

Btw. Scott responded to Kimball here: And I responded in the comments here:

PS I’ve always liked Bryan’s term.

johnleemk June 4, 2012 at 4:54 pm

My impression has been that Old Keynesianism wasn’t even concerned about monetary policy at all, focusing purely on the usefulness of fiscal policy levers. New Keynesianism on the other hand acknowledges that monetary policy has a role to play too — but tends to assume its only lever is interest rates. The overwhelming recommendation one sees in public discourse is “Rates are at zero, monetary policy is useless,” because vulgar Keynesians overlook the fact that “theoretical” sources of leverage, like the printing press, are actually highly effective. Krugman himself proclaimed in 2008 and 2009 the uselessness of monetary policy at the ZLB: see and

Krugman is not an Old Keynesian; he acknowledges that when rates are not at zero, monetary policy should be used. But for some reason he lent significantly more emphasis to the “Monetary policy is useless at the ZLB” interpretation of New Keynesianism, as opposed to the “Other forms of monetary policymaking besides interest rates should be used” interpretation. He’s only begun to backtrack in the last year or two, but public discourse is still firmly entrenched in the vulgar Keynesian notion of the ZLB.

Joel Bellaiche June 4, 2012 at 7:41 pm

Thanks Johnllemk, your comment clarified a little bit the post which initially was quite obscure for me (I am not a professional economist). But still, what are
the monetary tools that, according to the post, should be used now by the Fed, would be recommended by Milton Friedman, and are now forgotten by both the Keynesians
and the Austrians ?

If it is “QE”, then people like Krugman are already recommending it (though they warn it would probably not be sufficient). Same thing for fixing a higher inflation target ?
What else ?

Meegs June 4, 2012 at 8:39 pm

NGDP targeting.

johnleemk June 4, 2012 at 10:03 pm

Milton Friedman:

“Monetary growth has been too low. Now, the Bank ofJapan’s argument is, ‘Oh well, we’ve got the interest rate down to zero; what more can we do?’”

“It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.”

Essentially, print more frigging money.

Brett McDonnell June 4, 2012 at 2:13 pm

Seems like quite a broad overstatement, at least on the center-left side. To take 3 examples of high profile bloggers (and economists, for 2 of the 3), consider Krugman, DeLong, and Yglesias. Surely none of them is saying we should focus only on fiscal policy and ignore monetary policy. Indeed, all are quite highly, visibly, and continually critical of Bernanke and the Fed for not doing enough. They may believe that monetary policy alone is not enough under current circumstances, but they see monetary policy as a crucial element of what needs to be done. That strikes me as a quite widespread position for center left wonks at this point.

Saturos June 4, 2012 at 2:17 pm

No, their level of perceptiveness is quite rare. See how many others you can name. As a fraction of all commentators.

Phil Perspective June 4, 2012 at 2:51 pm

Yglesias isn’t worthy of being mentioned in the same paragraph, much less the same sentence, as Krugman and DeLong. Why do you hate those two?

Saturos June 4, 2012 at 3:15 pm

Yglesias is not an economist, but he’s every bit as smart as those two. As Tyler, Scott, and indeed Krugman and DeLong will readily acknowledge.

Bender Bending Rodriguez June 4, 2012 at 5:47 pm

I think you meant to say: As Yglesias will readily acknowledge.

TallDave June 5, 2012 at 10:56 am

Yglesias is not an economist, but he’s every bit as smart as those two.

Finally, something the left and right can agree on.

johnleemk June 4, 2012 at 4:55 pm

“Surely none of them is saying we should focus only on fiscal policy and ignore monetary policy.”

In 2008 and 2009, Krugman stressed the impotence of monetary policy, insisting “fiscal policy is the only game in town”. See and

Michael June 4, 2012 at 7:27 pm

I too read the quote:

“Those who believe no stimulus is necessary, everything is supply-side. Those who believe stimulus is necessary but only fiscal stimulus can or should supply it.”

and thought…who are these people in the second group? My RSS reader is FILLED with posts by people who not only support fiscal stimulus but seem to continuously write about things they wish Bernanke/The Fed would do. There’s lots of talk about a need for QE3, NGDP targeting, changing inflation expectations, etc. (and I don’t mean just from Yglesias, DeLong, and Krugman…the names someone else listed).

johnleemk June 4, 2012 at 10:12 pm

Regardless of what the econ bloggers are saying, it clearly isn’t filtering through to the business press, the politicians, the policymakers, or the general public. Larry Summers recently wrote an op-ed boiling down to “Rates are zero, so what can we do? Well, more fiscal stimulus” with nary a hint that monetary policy might matter. The business press is full of articles like this:

Business reporting has centred for as long as I can remember on interest rates as the indicator of monetary policy. Unsurprisingly, when rates hit zero, the layperson thinks “well, what can the Fed do?” The business press has if anything furthered this nonsensical notion of the ZLB’s castration of monetary policy.

I see it as telling that the Obama administration and Democratic Senate waited two years to fill the empty FOMC seats, and their first choice was an economist who openly proclaimed that the Fed in this climate is simply unable to get inflation up to 4%. It shows the Democrats don’t take monetary policy seriously. They would welcome more stimulus, but they just don’t see the Fed as a serious candidate for providing that stimulus — so they basically ignored it.

VangelV June 4, 2012 at 2:32 pm

The problem for monetarists is that their theories have been exposed to be as bad as those of the Keynesians that they so detest. Friedman was great on many subjects but money is not one of them. And as time passes and keeps showing how of all the competing schools it was the Austrians who got it right we expect to see more and more such attacks from both the left and the right.

Phil Perspective June 4, 2012 at 2:52 pm

What have the Austrians got right? This crisis has done more to discredit them then it has even Milton Friedman.

Saturos June 4, 2012 at 3:12 pm

Are you kidding there? He was talking about the country.

The Anti-Gnostic June 4, 2012 at 4:14 pm

The part where they said central bank monetary policy leads to malinvestments which must inevitably be liquidated. And sure enough, in 2008, they were.

There is no cure for economic recession. The recession is the cure.

VangelV June 4, 2012 at 5:14 pm

It seems to me that the Austrians got most of their predictions right. While they made it clear that the timing was not possible to guess because there were many ‘tools’ available to the central planners the Austrian School economists made it clear that the final outcome was inevitable. They pointed out that the Fed’s injections of liquidity were creating a tech bubble. They made it clear that the GSEs and the Fed were creating a housing bubble. They are now saying that the CBs are creating bond bubbles everywhere. Expect to see currencies around the world become worthless and a cascade of sovereign bond bubbles bursting one after another.

Michael June 4, 2012 at 7:40 pm

Out of curiosity, what role do you feel the Fed and the GSE’s played in the housing bubbles experienced nearly simultaneously by many countries across the globe?

Here’s a rough list of the countries I’m referring to:

Argentina, Britain, Netherlands, Italy, Australia, Canada, New Zealand, Ireland, Spain, Lebanon, France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Norway, Singapore, South Korea, Sweden, Baltic states, India, Romania, Russia, Ukraine and China.

Komori June 5, 2012 at 10:36 am

I’m not familiar with most of those, but I don’t think anyone is saying that the Fed and GSEs were the only problem. Spain is pretty clearly a parallel case involving their own institutions.

When it comes right down to it, when there’s an asset bubble being pumped, there’s only so many places for it to go. For a lot of reasons, housing has long (always?) been a natural first choice. It shouldn’t be surprising that the same answer came up in many different places at once.

The Original D June 5, 2012 at 11:03 am

How did the Fed create the tech bubble?

Doc Merlin June 6, 2012 at 2:51 am

Feds don’t create bubbles. They merely give bubbles fuel to grow, but holding rates too low… which moves supply of money for investment to stocks and commodities from bonds and debt. When they raise it too high, you get the effect in the opposite direction.

Saturos June 4, 2012 at 3:13 pm

VangelV, see the Nick Rowe link in my reply to Turing Test.

derek June 4, 2012 at 3:35 pm

The previous bouts of monetary stimulus have had the nasty effect of enriching those who are first in line for the printed cash (who would otherwise be insolvent) and impoverishing everyone else with spotty price increases for things that happen to be needed by everyone.

The ugly reality is that the fools who brought us here won’t bring us out. It seems my prediction may come about; this won’t be over until there isn’t any more money to be lost. It will take that to disabuse everyone of the perceptions that led us here.

The solution is very simple. Writedown of 1/4 to 1/3 of worldwide private and public debt.

IVV June 4, 2012 at 3:52 pm

“Hmm, writedown of debt? Sounds good… let’s start with deposits.”

derek June 4, 2012 at 11:40 pm

It would be interesting to calculate the cost per taxpayer in Ireland of assuming the obligations of the banks. Over the term to repay. Would it be cheaper to forfeit your deposit and let the banks go bankrupt?

I don’t think it will be what we want. What would the US bank deposit guarantee be worth if there was the necessity to not borrow any more money a la Greece or Spain? Probably as much as the Spanish folks think theirs is worth.

TallDave June 5, 2012 at 10:58 am

How would you factor that precedent into future interest rates if you were a lender?

Mario Rizzo June 4, 2012 at 3:42 pm

It is a tragedy that we live in a world of such “vulgarity.”

UnlearningEcon June 4, 2012 at 3:56 pm

I will put aside the fact that I think NGDP targeting is nuts.

This guy is full of shit. Why do market monetarists INSIST on acting like the downtrodden underdogs? At NO POINT have New Keynesians spoken out against NGDP targeting – Krugman has expressed skepticism but echoes calls that the Fed should try to do more, as does Brad Delong. It’s either direct misrepresentation or ignorance on the side of the market monetarists to say NKs believe that monetary policy is completely worthless.

Matt Waters June 4, 2012 at 7:12 pm

Krugman and Delong have given many arguments that basically say that Fed action is pushing on a string and fiscal policy is the only effective mechanism. When Krugman wrote a blog post supporting NGDP targeting, he basically did it kicking and screaming. He basically said “NGDP targeting is a really, really poor alternative but I’ll support it anyway because it’s something to do.” Unfortunately for them, the evidence points to the fact that NGDP targeting can work and in effect makes fiscal policy useless or even downright harmful.

Ricardo June 4, 2012 at 10:09 pm

I don’t think this is a fair characterization of Krugman or DeLong. First, as many people will already know, Krugman wrote a paper supporting quantitative easing for Japan back in 1998 but noted that in order for it to work, the central bank had to credibly commit to consistently higher levels of inflation until GDP and unemployment were back on track. As far as I know, he stands by this paper today.

In a blog post, he cites Eggertsson on the problems of credible commitment in monetary versus fiscal policy: “There are some writers who suggest that all we need is more determination on the part of Bernanke et al; while I dearly wish the Fed would try harder, it’s not all that easy, because just pushing out money doesn’t do anything. You either have to buy lots of long-term assets — we’re talking multiple trillions here — or credibly commit not just the current FOMC, but future FOMCs, to pursuing higher inflation targets. Part of the argument for fiscal policy as a response to this crisis is precisely that it doesn’t pose the same kind of commitment problems — a point that Gauti Eggertssson has made at length, e.g. here (pdf). On the contrary, a surge in government purchases of goods and services is more, not less, effective if the public believes that it’s only temporary.”


DeLong tends to agree with Krugman about 95% of the time so I won’t spend the time to dig up DeLong’s quotes on the subject. It appears Sumner does not really understand what the policy debate is over. It is really about politics and what can practically be implemented. Central banks appear to have a strong fear of any signs of inflation at all: getting them to credibly commit to future higher levels of inflation (which is what QE and NGDP targeting in effect both call for) is very difficult without a radical change in the mindsets of those in charge. You could say the same about fiscal policy and the political systems of the U.S. and Western Europe but that is an argument over political economy and not macroeconomics.

brett June 4, 2012 at 4:04 pm

Actually, for someone on the left like me, Milton Friedman is not too far to the right. I get the impression that Krugman also does not think that Friedman is too far to the right. The only people that hate Friedman right now are the far right in Congress, the media, and among the public intellectual class – or the people that hate Federal Reserve.

Joel June 4, 2012 at 7:44 pm

In France, almost everyone seems to hate Milton Friedman, “cet ultra-libéral effréné” (where of course, “libéral” there means a quite different thing that “liberal” here) –
and almost no one seem to have read it.

Daniel Kuehn June 4, 2012 at 4:30 pm

This really didn’t deserve reposting, Tyler. It’s surprisingly ignorant. Keynesians around Krugman and DeLong have been saying since the beginning of the crisis that we need more expansionary monetary policy, they’ve been citing Friedman on this since the beginning of the crisis, and they’ve been making the point that the liquidity trap makes fiscal policy viable – not that it provides a reason for Bernanke to keep money tight.

These market monetarists are in their own little world where – as Unlearningecon rightly said above – they insist on acting like downtrodden underdogs. Keynesians have said that monetary policy still has a role to play – not through lowering interest rates but through raising inflation expectations. And that’s been the Keynesian line for a long time now.

I don’t think we should be validating johleemk’s misstatements on this point.

Now, is there a question of whether they can credibly commit to it? Yes – that’s a very big open question that Scott Sumner and most of the market monetarists choose to ignore. That’s why Keynesians have been advocating throwing everything we’ve got at it. In a liquidity trap, fiscal policy is viable. Let’s hope the Fed can raise inflation expectations too. But for God’s sake let’s not put all our eggs in one basket.

johnleemk June 4, 2012 at 4:48 pm

Krugman said in 2008, “fiscal policy is the only game in town”. See:

In 2009, Krugman argued that the US was at the ZLB, making monetary policy “ineffective” at providing any stimulus:

Krugman has finally begun coming to the light, but at the time when monetary stimulus was most essential, he was essentially yelling “Don’t worry about monetary policy, it can’t do nuts!” — and he was yelling this based purely on interest rates. The effects of this unfortunately reverberate in public discourse until today.

Andrew June 4, 2012 at 4:56 pm

Without agreeing with or disputing your links here, you can’t point to Krugman’s statements in 2008/2009 as a defense of your original statement “Those who believe stimulus is necessary but only fiscal stimulus can or should supply it.” You’re making a point of what someone like Krugman believes today, not 3-4 years ago.

johnleemk June 4, 2012 at 5:12 pm

Larry Summers essentially says “Fiscal policy is the only game in town”:

One only needs to read the business press to realise that most commentators fall into one of those two camps I outlined. Market monetarists remain a distinct minority, even though looser monetary policy is the textbook prescription.

UnlearningEcon June 4, 2012 at 4:58 pm

Even if the NKs were previously skeptical of monetary policy they have changed their minds over time. If MMs want the underdog narrative – great, they were the underdogs but now they are coming through! Monetary policy has being accepted as a potential tool in theory by New Keynesians – they are now on the same side.

The reality is that MMs are far more reluctant to accept fiscal policy than the New Keynesians are to accept monetary.

Daniel Kuehn June 4, 2012 at 5:02 pm

Don’t fall into his trap unlearningecon. You had a good point earlier (and thanks for letting me know about the post, btw). This is not a new thing. Krugman was saying this from the beginning.

1. ZLB means we need to start talking fiscal policy
2. Expectations traps mean that the normal expectations channel may prevent monetary policy from doing its job – but we still need to try it.

Scott Sumner acts like 1. is all that Krugman has been saying. There are legitimate disagreements over 2. as well, but it’s not a disagreement over whether we should do monetary stimulus. It’s a disagreement over how much to expect from it.

Not only was Krugman saying monetary policy still worked in a liquidity trap in 2008 (just not through interest rates!), he was saying it back in the 90s. The problem is we’re dealing with a lot of very uncertain stuff and results are contingent on how the market reacts. Manage expectations? Yes. Forget monetary policy? No – that was never the claim.

Daniel Kuehn June 4, 2012 at 4:58 pm

johnleemk I don’t know if you’re deliberately obscuring what Krugman said in the beginning of the crisis or if you’re genuinely unaware of it.


This is not “just coming around to it”. He does have doubts about what monetary policy can do because of the so called “expectations trap”. Scott doubts there is such a thing. OK, we can argue about that. But don’t tell me that Keynesians like Krugman have said that we shouldn’t do monetary policy.

ZLB says fiscal policy won’t crowd out private investment. Do fiscal policy. You need to read “only game in town” in the context of everything else Krugman was saying 2008, which was that we needed monetary stimulus but that we had real trouble with an expectations trap.

Stop selectively quoting and trying to pass that off as “analysis”. We need a chorus of agreement on this, not a self-serving wing of market monetarists acting like they’re the only ones that know that we need looser monetary policy right now.

johnleemk June 4, 2012 at 5:20 pm

“You need to read “only game in town” in the context of everything else Krugman was saying 2008, which was that we needed monetary stimulus but that we had real trouble with an expectations trap.”

Ask a fairly educated layperson — say Barack Obama — to read what Krugman was writing in 2008, and ask him or her what Krugman’s suggesting policymakers do. The conclusions of his articles are always the same: do more fiscal stimulus, and ehhh, I guess monetary stimulus is worth a try (that’s at best — at worst, it’s “Fiscal policy is the only game in town”). Krugman consistently made monetary policy seem like something that should be a distant second in policymakers’ priorities. Is it any surprise that Obama told Romer that the Fed had “blown its wad” at the height of the crisis, making it ineffective?

By their fruits, ye shall know them. The left has controlled the US government since 2008, and its legislative priorities were fiscal stimulus and healthcare reform. The FOMC had two unfilled seats for well over a year, going on two — and the president’s first choice was Peter Diamond, someone who notably believes the Fed is presently unable to stimulate. We’ll see how the 2nd and 3rd choices pan out. The simple fact is that if Krugman has been trying to persuade Democratic policymakers that monetary policy should be tried, he hasn’t been very successful — at least not until 2012, 4 years after he was supposedly full-on exhorting monetary stimulus.

There is absolutely no excuse for this. The political fallout from a recess appointment of two hardcore inflation doves to the FOMC is completely dwarfed by the political fallout from a trillion-dollar fiscal stimulus package. The level of effort necessary to reach the necessary number of votes for filling two empty FOMC seats is completely dwarfed by the level of effort necessary to reach the necessary number of votes for a hundred billion-dollar fiscal stimulus package. Given the relative bang for buck, monetary policy was a no-brainer — and it has been completely ignored by policymakers until lately. What excuse do economists on the left have?

Daniel Kuehn June 4, 2012 at 5:29 pm

Right – that’s what I’ve been saying (minus the editorialization you added). Fiscal policy is a good idea, monetary policy is less reliable than we traditionally think it is, but it is also a good idea: do both. That’s always been the Keynesian position here.

So stop saying the Keynesians think ZLB means we should forget monetary policy, and instead just admit that while market monetarists and Keynesians have disagreements on details there is no disagreement on whether we should be doing monetary stimulus, there is no disagreement on the value of Friedman, and there is no disagreement that interest rates aren’t the only channel that monetary policy works through.

You’re obviously not budging – I’m not sure what else to do. It’s like you want people to disagree with you.

Andrew June 4, 2012 at 5:29 pm

You destroyed your credibility with this statement “The left has controlled the US government since 2008, and its legislative priorities were fiscal stimulus and healthcare reform.” You should probably stop now.
Even if you consider the entire Democratic party ‘the left’, then US government control was lost to them when Scott Brown was elected in Massachusetts in January 2010. Did you also not notice the 2010 elections?

Matt Waters June 4, 2012 at 7:37 pm


I’ve read Krugman for years and his views on monetary policy on conflicting to say the best and downright antogonistic at its worst. With Krugman, I see two distinct views on monetary policy that seem to change depending frequently among Keynesians/NK’s:

1. Monetary policy has structural reasons why it won’t work well in a liquidity trap.
2. Monetary policy has political reasons for why it won’t work well in a liquidity trap.

Through a sleight of hand, they can sound very similar to the untrained ear, but they argue very, very, very different things. For example, here’s Krugman talking about the expectations trap in the post above:

“And how do you do that? No matter how much Japan increases the monetary base now, expectations of future money supplies won’t move if people believe that the Bank of Japan will move to stabilize the price level as soon as the economy recovers. And once you realize that central banks may not be able to move expectations about future money supplies, it becomes a real possibility that the economy will be in a liquidity trap: if interest rates are near zero, money printed now just gets hoarded, and monetary policy has no traction on the real economy.”

Absolutely! I couldn’t agree more. A central bank would need political will to get out of the expectations trap and that political will was not forthcoming by the BOJ because they were “responsible,” as Krugman says.

But then Krugman goes to a complete non sequitur: because Japan is too responsible to use monetary policy effectively, they need to become irresponsible enough to use fiscal policy effectively. Huh? How about becoming irresponsible enough to use monetary policy instead? Monetary and fiscal policy suffer from the same ill politically. How exactly is fiscal policy superior in that regard?

So, the political portion of the “expectations trap” makes no sense. Both fiscal and monetary policy need to change hearts and minds before they’re implemented effectively. That goes to the structural argument against monetary policy. Nobody serious would disagree that utterly irresponsible, Zimbabwe-esque fiscal policy wouldn’t inflate, but many people say monetary policy is pushing on a string at the ZLB. To make this case, Krugman leaves the (correct) monetarist reasoning I posted above based on expectations to the (incorrect) reasoning that monetary policy only works through interest rates. To say that monetary policy would never work in the ZLB, you have to say that the liquidity trap is so strong that if the following happened:

1. The Fed monetizes the entire debt.
2. The Fed monetizes all of the agency ABS.
3. The Fed charges a penalty rate on excess reserves.
4. The Fed restricts the rate at which the hard currency could be printed for reserves and put into vaults.
5. The Fed buys massive amounts of foreign currency.

That’s, conceivably, everything the Fed could do under current law if Bernanke did everything in his power (except for maybe penalty rates on excess reserves). To make the structural argument that monetary policy is pushing on a string, Krugman would have to say none of this newfound money would be spent. It would all be put…somewhere other than buying stuff in the economy and increasing demand. At this point, Krugman would revert back to the political issue of doing monetary policy to this extent. Yes, Bernanke would have trouble credibly going this far in the current political environment, but is it really easier politically for congress to pass a 2-4 trillion dollar stimulus package than for the Fed to change expectations?

TallDave June 5, 2012 at 10:51 am

Remember, Obama is a Chicago Way politician. Fiscal stimulus lets him help his friends. Monetary stimulus doesn’t. That makes it a harder sell.

msgkings June 5, 2012 at 1:59 pm

@ TD:

ALL politicians are ‘Chicago way’ politicians. Even your Republican employers.

TallDave June 5, 2012 at 3:15 pm

Oh good, msgkings is here to defend Democrats in the name of centrism, or something.

The House GOP unanimously voted to ban earmarks. They’re far from perfect, but they’re equally far from the Chicago Way. Not every politician bought a house with Tony Rezko.

Daniel Kuehn June 4, 2012 at 5:06 pm

Sumner on Krugman, from your link:

“He has repeated argued that inflation targeting can be highly effective in a liquidity trap.”

Let me know when you find an instance of Krugman calling for Bernanke to stop his infernal monetary expansion, then we can talk.

johnleemk June 4, 2012 at 5:25 pm

Market monetarists generally agree Krugman would be great to have on the FOMC. Nobody doubts his commitment to stimulus of any kind in a demand crisis. What I blame him for is his role as a thought leader, because those who are not economically-inclined who read him unsurprisingly take away a very different message from those who are actually familiar with the context of what he has written before on monetary policy.

If Krugman was communicating a dire need for monetary stimulus in 2008, it’s telling that it took Obama and his Democratic Congressional counterparts months going on years to fill the 2 empty FOMC seats. It’s telling that Obama’s first choice for an FOMC seat was Diamond, someone with little monetary background and whose statements suggest he doesn’t believe monetary stimulus can impact AD much presently. The Democratic government completely failed in monetary policymaking, in spite of the left’s thought leaders’ supposed vocal support for monetary stimulus.

Daniel Kuehn June 4, 2012 at 5:33 pm

re: “What I blame him for is his role as a thought leader, because those who are not economically-inclined who read him unsurprisingly take away a very different message from those who are actually familiar with the context of what he has written before on monetary policy.”

He’s focused on fiscal policy because people are more suspicious of that than monetary policy. Obama himself famously dismissed it, to Romer and Summers’s dismay. The market monetarists who should be advocating demand policies dismiss it. The Europeans denounce our attempts at fiscal policy. And any whiff of stimulus gets people talking about Greece and Spain.

There is broad agreement on the value of monetary policy from everyone but the Ron Paul crowd.

There is much less of a constituency for fiscal policy.

Which one do you think needs advocacy from a Nobel laureate? Do you think anyone out there thinks that Krugman doesn’t want the Fed to be more expansionary? Do you think anyone thinks that left-leaning economists in general don’t want the Fed to be more expansionary? Of course not. This delusion is almost exclusive to the market monetarists, and it baffles me.

Your comments suggest that maybe the reason is that the ZLB has been invoked so fervently as a defense of fiscal policy. Maybe that’s it. But I really don’t think anyone else is making this mistake but you.

Matt Waters June 4, 2012 at 7:45 pm

“There is broad agreement on the value of monetary policy from everyone but the Ron Paul crowd.”

No, there isn’t even broad agreement on the FOMC. The hawks like Fisher and Plosser may not be into conspiracy theories about Fort Knox gold, but otherwise they are every bit as draconian as Ron Paul.

But if there is this extremely broad agreement outside of crazy Austrians, then why does monetary policy have an expectations trap where people are afraid the Fed won’t do enough politically? Either there is wide agreement that we should do as much monetary policy as possible or there isn’t a political issue. In fact, 98% of economists do not believe in the former and there is a political issue.

The question then becomes, why all the political force behind fiscal stimulus, when monetary stimulus could do the job if it got over political hurdle? Why not just make the argument simpler and go straight for monetary policy?

Daniel Kuehn June 4, 2012 at 8:46 pm

OK, I guess a little rhetorical flourish is off the table when Matt’s around!

Yes, the circle is indeed wider than the Ron Paul crowd. My apologies. But it’s still much broader than the crowd supporting fiscal policy.

TallDave June 5, 2012 at 11:49 am

Krugman advocated strongly for a multi-trillion dollar fiscal stimulus. Relatively speaking, his position on monetary expansion has been to damn it with faint praise.

The only mystery is why anyone expects anything different. Fiscal stimulus gives Krugman the state expansion he wants, irrespective of the economic effects, be they for better or worse. Monetary expansion might reduce unemployment, but it doesn’t advance statism.

His buddy DeLong is in full jihad against the GOP, pushing fiscal stimulus as the solution lets him pretend Team Red is out to destroy the country. Monetary stimulus doesn’t.

johnleemk June 4, 2012 at 5:50 pm

Restarting the thread from above because it’s getting too deep to reply in-line…


“You’re obviously not budging – I’m not sure what else to do. It’s like you want people to disagree with you.”

The context of my original post was “[t]he political and policy world” — the people who write for prestigious magazines, the people who walk the halls of power. It’s abundantly clear that the vast majority of these people fall into 1 of those 2 camps I outlined. I never said that Keynesian economists believe in vulgar Keynesianism (although some like Krugman certainly seemed to in 2008 and 2009, and Summers only this month declared that rates can’t be lowered, so fiscal policy is the only meaningful lever for stimulus).

The simple fact of the matter is that Keynesian economists have failed to communicate the importance of monetary policy to the public and especially the lay people who matter the most: people with power. Unsurprisingly, we had deflation for part of 2009 and have seen unheard of levels of low inflation since 2008, with an obviously anaemic Fed either reluctant to do more, or certain it cannot do more.

“There is broad agreement on the value of monetary policy from everyone but the Ron Paul crowd. There is much less of a constituency for fiscal policy.”

Then why did the FOMC seats lay unfilled for so long? Why no recess appointments, no leveraging of the Democratic Party’s control of the Senate? The broad agreement on the value of monetary policy in the political establishment has been “It’s not worth focusing on” — even though it would have been easier to pack the FOMC than it was to pass a fiscal stimulus package.


“Even if you consider the entire Democratic party ‘the left’, then US government control was lost to them when Scott Brown was elected in Massachusetts in January 2010. Did you also not notice the 2010 elections?”

The Senate is still held by the Democrats. Even if you focus on the 60-vote bar, Obama was finally able to fill the two FOMC seats recently. Why did he wait so long when he has the power of recess appointments, and he and Democratic Senators could have twisted GOP arms earlier to fill those seats permanently with people who can shape monetary policy more effectively? The fact of the matter is that the centre left has held the reins of monetary policy since 2008 and done…essentially nothing.

Daniel Kuehn June 4, 2012 at 6:07 pm

re: “Then why did the FOMC seats lay unfilled for so long? Why no recess appointments, no leveraging of the Democratic Party’s control of the Senate?”

Because Obama has shied away from demand side policy of any sort, and the Republicans certainly aren’t on board.

Perhaps I’m misunderstanding the significance that you’re attaching to these FOMC seats (which I obviously agree should have been filled). Obama and Congress have been a much bigger and more direct hold-up to fiscal policy done right than monetary policy done right, have they not?

Have the vacant seats really been the thing standing between us and a recovery? I just don’t buy it. Obviously I want them filled. If I remember a whole chorus of Keynesians did too. The point is Obama is doing much less damage on the monetary side because of that than he is doing on the fiscal side. I hardly see how you can indict Krugman and other public intellectuals on this basis.

If I remember correctly, everybody told the Republicans what idiots they were and then everybody forgot about it. Not the ideal course of action, of course – but are you telling me that that’s why we don’t have better monetary policy right now? That seems like you’re grasping for reasons to thrash Krugman to me.

Morgan Warstler June 4, 2012 at 7:08 pm

The debate is NOT does DeKrugman want inflation enough right now, that he’ll quietly endorse NGDP. That is boring. It is fact.

The issue is that DeKrugman doesn’t REALLY support the working premise of NGDPLT which is that commitment + level targeting = fiscal is worthless.

And by REALLY support it, I mean DeKrugman NEEDS Fiscal Stimulus as econ babble for redistributing wealth. So IF we found the NGDPLT kept growth stable (and begins to shrink the govt. as expected), DeKrugman would go ape shit against it full tilt.

With the Bernanke Put, Obama had his chance to be Clinton, and force the Fed to do keep doing QE… Obama could have done everything he could to cause deflationary forces (productivity gains) in the public sector from pipelines to forgetting Obamacare to ending Davis Bacon.

He could have done Fiscal Spending Austerity, Fiscal Stimulus Tax Cuts, and gotten QE to keep us at 2% no matter what.

Obama didn’t want to be Clinton and bend to the will of, leave it entirely to the Fed.

He and all progressives will learn their lesson in Nov.

Daniel Kuehn June 4, 2012 at 8:45 pm

Your conspiracy theories are completely unnecessary and more than a little condescending.

Krugman and DeLong have been up front about the fact that they’re worried about the ability to credibly commit. That’s why they want both. Sumner doesn’t make much of an expectations trap. That’s why. And if monetary policy does the trick and sterilizes fiscal policy we’ve lost nothing and built some schools.

Only Bryan would be upset about that!

Morgan Warstler June 5, 2012 at 10:49 am

Daniel, to get int he right mindset let me say thus:

Better there are NO schools, than one school too many

In such a mindset you re terrified to add schools lest the govt. grow an ounce too large and you lose the entire ball of wax.

THAT is the only acceptable mindset for a liberal. This is generally the mindset of business. Yes there is a willingness to take risk, but only with your own money, otherwise hazard.

I’m not condescending to you, I’m giving you a way of navigating the world where you achieve the most of your ends you can achieve, because you do it without treading into waters where the host becomes aware of the parasite.

TallDave June 5, 2012 at 11:19 am

And by REALLY support it, I mean DeKrugman NEEDS Fiscal Stimulus as econ babble for redistributing wealth. So IF we found the NGDPLT kept growth stable (and begins to shrink the govt. as expected), DeKrugman would go ape shit against it full tilt.

Exactly, this is why you never heard these “Keynesians” suggesting across-the-board spending restraint during boom times — they’re statists for whom Keynesian stimulus is convenient during busts, both to encourage fiscal expansion and to claim minarchists want to destroy the economy, while in boom times their “liberal conscience” immediately take the helm and insists we spread the wealth around.

Hence the vacuous insistence on some arbitrary “right” level of demand which fiscal policy will create via cheap borrowing, never mind whether another, even more gov’t-distorted debt bubble is really the correct answer to the collapse of the last one.

They’ll strongly endorse monetary policy only when the U.S. starts falling off this chart.

Matt Waters June 4, 2012 at 7:54 pm

Look at my arguments above for how much further monetary policy could theoretically go before it is truly “out of ammo.” Either:

1. Doing all that I listed above would still not produce the growth necessary.
2. Monetary policy is sufficient to overcome a drop in demand.

#2 pretty much invalidates any argument for fiscal stimulus. Therefore, Krugman and others must argue #1, that doing literally everything the Fed can do legally wouldn’t raise demand enough to hit an explicit NGDP target. Markets might theoretically think that the Fed would back off at 2% NGDP increase instead of the 10% NGDP it says it wants. But if the political attitude has truly changed (just as Krugman wants for fiscal policy), then why wouldn’t the market spend enough money to hit the Fed’s 10% NGDP target?

UnlearningEcon June 4, 2012 at 6:34 pm

For the love of god can people stop calling each other things like ‘vulgar’ and ‘dinosaur’? It’s a stupid rhetorical ploy and does nothing to advance actual debate. The attitude of many MMs just strikes me as a tribe trying their hardest to disagree with its ideological counterpart rather than people interested in coming to a rational policy conclusion.

johnleemk June 5, 2012 at 1:07 am

I didn’t coin the term vulgar Keynesian. The term harks back to Krugman’s critique of those who believe in monetary policy’s inefficacy:

That was one of my favourite essays when I first read it almost a decade ago, and it’s grown on me over time. Krugman even calls out the prognosticators who have failed to absorb any lessons in basic macro (and also suggests that his failure to make a dent on the public’s understanding of macro has a long track record): ” Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God. … The obvious (to me) point that the average unemployment rate over the next 10 years will be what the Fed wants it to be, regardless of the U.S.-Mexico trade balance, never made it into the public consciousness. (In fact, when I made that argument at one panel discussion in 1993, a fellow panelist–a NAFTA advocate, as it happens–exploded in rage: “It’s remarks like that that make people hate economists!”)”

For the term “vulgar Austrian,” I’ve seen it used elsewhere by others well before this, but I’m not sure whether or not I was the first to use it. In any case, it’s quite evident that the people spouting Paul’s views of macroeconomics are unfamiliar with Hayek’s understanding of the importance of the nominal economy to macro; one cannot simply disregard the money illusion as if it is a fantasy of the left.

UnlearningEcon June 5, 2012 at 8:05 am

That you did not coin it is not a sufficient excuse for using it.

MikeF June 4, 2012 at 7:54 pm

Krugman was on Marketplace today on the drive home. His policy suggestion? That countries that can borrow for cheap should do so, invest in infrastructure and rehire laid-off schoolteachers etc… and that the Fed and the ECB should “print lots and lots of money”. I think UnlearningEcon and Daniel Kuehn have it right: the MM crowd goes temporarily insane whenever evidence emerges that their position is mainstream instead of part of some brave truth-telling fringe.

Daniel Kuehn June 4, 2012 at 8:49 pm

Didn’t you read johnleemk! That’s just what he’s saying now.

I’m confident if you look at public appearances by Krugman back in 2008 he was scolding Bernanke for not tightening up and reprimanding Scott Sumner for the irresponsibility of suggesting that maybe we need more monetary stimulus.

johnleemk June 4, 2012 at 10:22 pm

Actually if you look at what Krugman wrote in 2008, any layperson would take away the message that monetary policy was done, stick-a-fork-in-it, over; see e.g. and

Is that what he was really saying? It doesn’t matter so much what he said, so much as it matters what the public, the press, and the people with power think he said. And I would bet money that if you show these articles to a sample of the general public and asked them what they took away from it, “The Fed can and should be doing even more” would not be one of the top 10 take-aways.

If Lars Svensson, Paul Krugman, Christina Romer, or Scott Sumner had been appointed to the FOMC at the earliest possibility, I would bet that inflation would not have been anywhere as low as it actually has been since 2008. Sure, some of these nominations might have caused a political uproar — but hardly one as terrible as the uproar if you seriously proposed a second, exponentially larger fiscal stimulus. The fight would be much more winnable and comparatively less bruising. And you would have people with monetary policymaking power who actually understand the lessons we learnt from the Great Depression.

The fact that Obama nominated Diamond, a man who openly said the Fed is incapable of producing 4% inflation in this economic climate, as his first choice to the Fed speaks volumes about the failure of economists to inform those in power about what monetary policy can and should be doing.

TallDave June 5, 2012 at 11:05 am

Krugman’s calls for even more massive deficits are the opposite of what Sumner has argued for.

I don’t know if that’s true for MM generally but it’s certainly true of Scott.

johnleemk June 5, 2012 at 12:45 am

The comments at Kevin Drum’s are priceless. Anyone arguing that left-leaning economic bloggers have successfully convinced their audience of the viability and usefulness of monetary policy, behold:

One commenter: “Fiscal stimulus is much preferable to monetary stimulus, in my opinion. There are 2 possible types of monetary stimulus: 1. Lowering interest rates. … 2. Buying bad debts from large banks.” (Yeah, I guess Friedman’s recommendation of buying more government debt is impossible.)

Another: “The real issue, in my mind, is how the commenter in question imagines a purely monetary policy might suffice, given that we are up against a zero lower bound. That’s the position that impresses me as ungrounded and incoherent.”

The comments suffice to refute Drum’s question. Whatever left-leaning economists may believe about the efficacy of monetary stimulus, the message is simply not getting out of the ivory tower — unless the message is precisely that monetary policy should be ignored, which, I’ve been repeatedly assured, is not the case.

Greg G June 5, 2012 at 9:58 am

Come on John. Arguing against the dumbest comments you can find on an opposing blog is a poor way to advance the debate no matter what the issue being discussed is.

johnleemk June 5, 2012 at 10:39 am

Actually if you read the comments, those are the smartest ones on the blog. Drum himself said in the post that economists agree the Fed can and should be doing more — and yet his most intelligent, coherent and engaged commenters were going on about the ZLB.

You can’t achieve success on this issue without moving the median voter. And the median voter who’s even paying attention to monetary policy clearly believes it can’t do nuts.

LesleyIlic June 5, 2012 at 4:19 am

Anybody here own the G-man RV gen set model 360 service tool that would allow me to rent it long enough to diagnose my genset? It would allow me to trouble shoot a microlite 2.8kva spec a that got power connected incorrectly during trouble shooting by a very Ill mechanic (who is now much better and over the illness) during the harsh winter here and has developed more problems than it had before I started working on it.
slip rings

Saturos June 5, 2012 at 5:59 am

Is there a better example of the gap between Market Monetarists and everyone else than this: ?

jomama June 5, 2012 at 6:04 am

The sound and fury is now deafening.

I can’t imagine what it will be like when this happens:

msgkings June 5, 2012 at 2:04 pm

That chart is a doozy, seeing as though it’s been linked to twice in this thread alone.

I’ll link you to my chart of ‘hypothetical sexual positions I’ll be doing with Megan Fox’ later, once I’m done with it.

TallDave June 5, 2012 at 10:45 am

I’m starting to comae back around to Scott’s monetary stimulus idea, since he’s started pairing it with fiscal surpluses.

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