Krugman remains “confused” -2

Maybe because of his infatuation with the ZLB, which supposedly characterizes the quintessential “postmodern” recession:

But I do think it’s important to realize that this dispute doesn’t invalidate a related point, namely, that the kind of recovery you can expect from a recession depends on the sources of that recession. Way back — before Lehman fell! — I argued that there was a distinction between modern and postmodern recessions. Pre-Great Moderation, recessions were brought on by the Fed, which raised rates to reduce inflation, then loosened the reins, producing a V-shaped recovery. Post-Great Moderation, with inflation low and stable, booms were allowed to run their course, so that recessions came from private-sector overreach — and the Fed had a much harder time engineering recovery. This was especially true after 2007, when we hit the zero sort-of lower bound.

The recessions of 69-70, 73-5, and 81-82 were responses to inflation and the high rates the Fed imposed to fight it; the economy bounced back when the Fed was done. The recessions of 90-91, 2001, and 2007-9 were completely different.

They were different in that the Fed had acquired credibility as an inflation avoider. The 1990-91 and 2001 recessions were shorter and shallower than those that took place in 1973-75 and 1981-82.
What distinguishes the 2007-09 “Great Recession” from ALL the others is that in 2007-09 the Fed allowed nominal spending to contract at a rate not seen by most living people. And the slow recovery is, symmetrically, due to the Fed keeping nominal spending growth on a leash (maybe all this happened because with Bernanke the Fed became an inflation “paranoid”).

So you don´t need to appeal to “austerity”, the (horrible) conduct of monetary policy explains both the “deep dive” and the “slow-motion resurfacing”.

PS. PK is repeating an old argument of his. And so am I!


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