Monday, November 24, 2014

For the Paul Krugman File

There are a number of points that Paul Krugman makes, today, in his column at NYT that require some highlighting and other comments that require filing away for later review as economic events unfold.

First, he continues to promote the idea that interest rates were at zero after the crisis. This is simply not the case.

He writes:
Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate, the interest rate it uses to steer the economy, more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more, because interest rates can’t go below zero.
Here's the Federal Reserve's own data on the effective funds rate, since rates collapsed:

The Fed funds rate, to be sure, is very low, but this is not a surprising phenomena following a financial crisis, but it is not zero and has indeed fluctuated throughout the period following the crisis.

Krugman likes to spread the myth of the zero bound being hit because he uses it to justify increased Federal government deficit spending:
[W]e were told again and again that budget deficits were our most pressing economic problem, that interest rates would soar any day now unless we imposed harsh fiscal austerity. I could have told you that this was foolish, and in fact I did, and sure enough, the predicted interest rate spike never happened — but demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.
And this is what needs to be filed away, despite accelerated price inflation over hanging the economy, Krugman wants more deficit spending and continued Fed driven low interest rates:
[I]nflation is low, wages are weak, and the Fed seems to realize that raising rates too soon would be disastrous...So the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time to come, which makes it crucial that influential people understand those realities. 
Just how is Krugman going to explain away this advice when the price inflation does accelerate?

1 comment:

  1. Bob, I think your concluding question was probably rhetorical (maybe not). However, it is a great question, because he will have an explanation.

    It would be nice to have his explanation documented in advance, so that we could then tell him, "We told you so."

    I'm just a casual observer, but I would expect his response would be something like: Well, if you would have followed my advice and printed more money sooner, this never would have happened.

    Of course, this is a very convenient explanation because there's no way to disprove it. Whatever the problem is, the solution is to print more and spend it.

    That's how I think he'll answer it. Your take?