This morning Krugman made a speech – Mr. Keynes and The Moderns (not, note, The Classics) – at the Cambridge Conference commemorating the 75th anniversary of The General Theory. He starts off:
So what am I doing here?
The answer, I suspect, lies in two things. First, in 1998 I was, I think, among the first prominent economists to give voice to the notion that Japan’s experience – deflation that stubbornly refused to go away, despite what looked like very loose monetary policy – was a warning signal.
He then comments on Woodford´s presentation:
One question I’ve been asked a lot is why I spent 2009 campaigning for fiscal expansion rather than monetary expansion. Well, at the Keynes conference this morning Mike Woodford gave an overview of policy options when you’re up against the zero lower bound that in some ways expressed better than I’ve managed to what I was thinking at the time.
First, Mike argued that monetary expansion once you’re at the ZLB mainly works, if it does, through affecting expectations. If people don’t perceive the expansion as representing a change in policy that will persist even after the economy has recovered, even big changes in the monetary base have hardly any effect.
Note both that Japan reversed much of the initial expansion in the monetary base, confirming the expectations of those who might have regarded that expansion as temporary – and Japan did this even though deflation continued! Note also that nominal GDP never moved at all despite the huge amount of money “printed”.
So why is a fiscal response any better? Mike argued:
1. A fiscal response to a severe slump doesn’t require committing yourself to changes once the storm has passed; it “only requires unusual action while the situation remains grave.”
2. Fiscal policy is “not wholly dependent on expectations changing for its effect (more robust to alternative models of expectations)”
So what was the right answer? I guess I’d say that if powerful political forces block any effective response to a crisis, there is no effective response to that crisis.
I think that the exclusive attention on Fiscal Stimulus back in 2009 was a due to the
NK view that MP is interest rate targeting, so that once the policy rate is “zero” you have to go “somewhere else for help”. Forgetting that FS leaves a “bad aftertaste” while not being of much help.
But to commit is essential! Otherwise you get into the kind of situation that Posner has described to explain why the recovery is lagging:
For what it’s worth, I think the major impediment to economic growth at present is uncertainty on the part of the key economic actors, namely businessmen and consumers. Businessmen are hesitant to hire and invest and consumers to spend, in both cases because of uncertainty about their economic prospects.
Once again, below the embodiment of “commitment”: State your NGDP Target and “shoot for it”.