“Everything reminds Paul Krugman of the GOP. Everything reminds me of sex, but I try to keep it out of my papers.”

This is Paul Krugman:

Actually, before I get there, a word about self-styled conservative “market monetarists”: guys, have you noticed who your real policy enemies are? People like me, Brad DeLong, etc. are skeptical about the Fed’s ability to offset the effects of fiscal austerity, but we do want it to try. The furious academic opposition to quantitative easing is instead coming from moderate conservative macroeconomists, notably Taylor and Feldstein. So your problem isn’t just that the GOP’s effective leader on economic issues gets his macro from Francisco D’Anconia; it’s that even the not-so-silly wing of the party is dead set against what you consider reform.

When I read Krugman’s comment I came to think about what Robert Solow once said about Milton Friedman:

“Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”

Paul Krugman undoubtedly is an extremely clever economist and when he actually writes about economics – rather than about obsessing about the US Republican party – he can be very interesting to read.

Unfortunately he is no better than the people on the right in US politics he so hates. It seems like every issue he writes about has to involve the Republican Party. Frankly speaking I find that extremely boring and massively counterproductive.

Personally I refuse to participate in the tribalism advocated by Paul Krugman. I do not judge economists and their views on whether they are affiliated with the Republican party or the Democrat party in the US. I find these affiliations utterly irrelevant.

It is of course correct that Market Monetarists tend to agree with Keynesians like Krugman and Brad DeLong that the main economic problem  in the US, Japan and the euro zone right now is weak aggregate demand (we would say weak NGDP growth). None of ever denied that. However, we equally agree with John Taylor that monetary policy should be rule based and we agree with Allan Meltzer (at least the ‘old’ Meltzer) that monetary policy is highly potent. That is as least as important – or maybe even more important – when it comes to policy advocacy.

Furthermore, as particularly Scott Sumner often has argued that Paul Krugman has been extremely inconsistent on his view of monetary policy – sometimes he seems to that there is no role for monetary policy (he seems as obsessed with the imaginary liquidity trap as he is with the GOP) and sometimes he thinks monetary easing is great and will work. Or said in another way – we tend to agree the New Keynesian Krugman, but have no time for the paleo-Keynesian Krugman.

Finally would you all stop calling Market Monetarists “conservative”. As far as I know most of the Market Monetarist bloggers are either apolitical or think of themselves as libertarian or classical liberal. I am certainly no conservative – neither was Hayek nor was Friedman.

PS Josh Barro might be to “blame” to this discussion. It is probably this comment that triggered Krugman’s response:

“But while market monetarism is the shining success of the conservative reform movement, it also points to trouble for the reformists. We have had zero success in convincing Republican elected officials that easy money is ever a good idea. The Republican party has gotten, if anything, more rabidly afraid of inflation and more flirtatious with the idea of returning to a gold standard. The 2012 Republican National Convention adopted a platform calling for a “commission to investigate possible ways to set a fixed value for the dollar.”

PPS I feel that this blog post might have been a complete waste of time writing so I hope that I at least have not wasted your time as well.

PPPS Scott also comments on Krugman as do Dilbert:



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Josh Barro do indeed favour NGDP level targeting

A couple of days ago I noted that Josh Barro had a good understanding of US monetary policy and the causes of the Great Recession. In my post I wondered whether Josh also would favour NGDP level targeting.

He is Josh’s “answer”:

I would prefer to see the Federal Reserve adopt a rule, such as NGDP level targeting, that would lay out an orderly path for monetary easing in recessions and tightening upon recovery. But I don’t think we need to worry about the Federal Reserve losing its grip on any ad-hoc decisions to allow some moderate inflation. It’s just not in this Fed’s nature—and the markets know it.

The quote above is from an article today in on the Forbes website where he discusses Amity Shlaes’ very odd claim that Milton Friedman would have been against QE in the US over the last couple of years. I don’t want to go into that discussion (I will simply become too upset…). Let me instead quote Josh:

The Cleveland Fed inflation estimates, based on financial market data including the interest rate spread between ordinary and inflation-protected Treasury bonds, show expected inflation of 1.4 percent per year over the next ten years. So, if Shlaes knows about an inflation bomb that the young guns on Wall Street can’t see, she has the opportunity to go make a ton of money in the bond markets.

Inflation isn’t nearly as mysterious as Shlaes makes it out to be. Milton Friedman is on point here: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” If inflation starts to get out of control, all the Fed has to do is contract the money supply.

The Fed is sure to have to do this in the medium term. The housing crash, banking crisis and recession caused a sharp drop in the velocity of money. MV = PQ, so the Fed had to greatly expand the monetary base in order to prevent deflation. As the velocity of money picks up, the Fed will need to contract the monetary base to prevent rapid inflation.

If it’s this simple, why do countries ever have undesirably high inflation? Sometimes, as with Zimbabwe, it’s because they’re printing money as a fiscal strategy. At other times, as in the U.S. in the 1970s, there is insufficient political will for the sometimes-painful step of monetary contraction.

The former is not a serious fear in the United States. As for the latter, it is possible to imagine a central bank that lacks the discipline to tighten when appropriate. But not this Federal Reserve, which has a strong bias toward disinflation and many of whose members seem to have had to be dragged, kicking and screaming, into the insufficient amount of easing we have had to date.

Josh is obviously completely right and I hope that he in the future will continue to participate in the debate concerning US monetary policy and continue to advocate NGDP level targeting.

PS David Glasner also has a comment on Amity Shlaes’ claims concerning QE and Milton Friedman – HEALTH WARNING! My friend David is moderately critical of Friedman in his comment – despite of this we are still friends;-)

UPDATE: Scott Sumner also has a comment on Josh Barro.


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