Krugman´s beliefs at the “Zero Bound” have changed radically!

Taking a cue from Lars Christensen, there´s more on “monetary freak” Krugman. This also from a 1999 piece: “Morning in Japan?” (Click on Japan in the sidebar and than on the article title):

SYNOPSIS: Japan’s considerable problems can still be solved with Monetary policy.

The winter of 1981-82 was a grim one for the U.S. economy. After a nasty recession in 1980, there had been a brief, hopeful period of recovery–but by early 1982 it was clear that a second, even worse recession was underway. By late that year the unemployment rate would rise above 10 percent for the first (and so far only) time since the 1930s. So bleak was the prospect that in February the New York Times Magazine ran a long article (by Benjamin Stein) titled “A Scenario for a Depression?” which suggested that “the nation has arrived at a new spot on the economic map where the old remedies–or what we thought were remedies–have lost their power and the economic wise men have lost their magic.” Stein and many others worried that after nearly a decade of disappointing performance, the U.S. economy might simply fail to respond to monetary and fiscal policies, that a self-reinforcing downward spiral of pessimism and financial collapse might already be out of control.

Fortunately, however, it turned out that the old remedies were just as powerful, the nostrums of the economic wise men just as magical, as always. The Federal Reserve Board, which had been following a strict monetarist rule, reversed course in mid-summer and opened up the monetary taps. Interest rates came down, the stock market rose, and by early 1983 the economy was unmistakably on the mend. Indeed, as the workers and factories left idle by the slump went back to work, output soared: Real GDP grew almost 7 percent during 1983, and in 1984 Ronald Reagan was triumphantly re-elected under the slogan “It’s morning in America.” It wasn’t: Once the slack had been taken up, growth slowed again, and over the ’80s as a whole the economy actually grew a bit less than it had in the ’70s. But the surge in 1983 was a spectacular demonstration of the way that a sufficiently expansionary monetary policy can reverse a depressed economy’s fortunes.

Update: Krugman should have left out the 1980-82 period of “transition from high to low inflation”. Once you do that, average real growth in the 1983-89 span was higher than in the 1970s.

6 thoughts on “Krugman´s beliefs at the “Zero Bound” have changed radically!

  1. RE: the update
    If you leave out the really bad years 1980-1982, then maybe you should also leave out the really good rebound years 1983-84 as well. Otherwise you are cherry-picking.

    • Art, I didn´t call 1980-82 “bad years”, but years of adjustment to a lower rate of inflation. 1983/84 were “outstanding” years only because the adjustment was made, i.e. they were the “pay-off” to the “investment”.

      • They were nevertheless “bad years”.

        If your method is correct, then we should *always* try to have really high inflation, so that we can crush it, ignore the bad years, and only count the good ones!

        I don’t buy it.

      • Art, sorry but your argument doesnt make sense. Its much like the one that says high economic stability is bad because people become risk lovers and get into all sorts of problems. In any case, even if you take out 1981 -1984, for the rest of the decade gowth was still an impressive 3.8% on average, better than the 70s average of 3.6% (or just as good).

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