In the old west “snake oil” was peddled as a magic cure all elixir. For Krugman, “liquidity trap” is a “cover all” for all kinds of “weird” policies, even those he was at other times very much against. From Krugman:
But given our economy’s desperate need for more jobs, a weaker dollar is very much in our national interest — and we can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit.
That, above all, means China.
In his long comment on Krugman´s post, Scott Sumner writes:
China bashing helps, if it helps at all, by boosting AD. No one claims it boosts the supply-side of our economy. So Krugman cites Ben Bernanke in defense of the argument that we need more AD to reduce unemployment; even though Ben Bernanke is the guy that controls AD, and who defends current Fed policy as being appropriate, and who opposes higher inflation despite the fact that any attempt to boost AD (especially tariffs on Chinese goods) will mean higher inflation.
Without mentioning Sumner´s critique, Krugman comes back and “defends” his about face by appealing to the presence of a “liquidity trap”:
Now, some people will ask, didn’t I used to be a free-trader? Yes, and under normal circumstances I still mostly am. But these are not normal circumstances! In an economy that isn’t in a liquidity trap, one can reasonably assume that jobs lost due to Chinese exports will be offset by jobs gained elsewhere, although that may be small comfort to the workers affected. Under current conditions, however, there is absolutely no reason to believe that there are offsetting gains — on the contrary, the losses to import competition are magnified through multiplier effects.
But from Krugman we´ve come to expect second and even third intentions. Courtesy of Patrick Sullivan who directed us to this post:
Let’s flash back to Krugman 2003, when Krugman was bashing Bush for even suggesting that the yuan was manipulated and undervalued:
Instead, however, he’s [Evil, stupid, President Bush. And did I mention “Evil”? And “Stupid”?] decided to plead with the Chinese for help [with our jobless recovery].
Admittedly, it didn’t sound like pleading. It sounded as if he was being tough: ”We expect there to be a fair playing field when it comes to trade. . . . And we intend to keep the rules fair.” Everyone understood this to be a reference to the yuan, China’s supposedly undervalued currency, which some business groups claim is a major problem for American companies.
Yes, just as “snake oil” cures all, an “appeal” to “liquidity trap” absolves him from any inconsistency he could be accused of practicing!
And as an economics Nobel Prize winner Krugman shouldn´t make the same recurring mistake made by journalists when commenting on the GDP release, to wit, that a smaller trade deficit would have resulted in higher growth! A modern day “mercantilist” argument:
Ask yourself: Why is it so hard to restore full employment? It’s true that the housing bubble has popped, and consumers are saving more than they did a few years ago. But once upon a time America was able to achieve full employment without a housing bubble and with savings rates even higher than we have now. What changed?
The answer is that we used to run much smaller trade deficits. A return to economic health would look much more achievable if we weren’t spending $500 billion more each year on imported goods and services than foreigners spent on our exports.