Economic History at U.C. Berkeley
Why Are the Technocrats of the Center Missing in Action?

The Pointless Pain Caucus Is Inventing Reasons on the Fly to Object to Quantitative Easing...

Paul Krugman:

Bernanke And The Shibboleths - [W]e have an excess of desired saving over desired investment, even at a zero interest rate.... How did this happen?... [O]ver-borrowing in the past has left large parts of the world credit-constrained, forced to deleverage... even a zero interest rate isn’t enough to persuade the unconstrained players to increase spending by enough to offset these cuts. Yet interest rates can’t go below zero; which poses a problem. For the world as a whole, savings must equal investment.... So this incipient excess of savings leads to a depressed world economy, in which income falls to match the amount people are able/willing to spend.

So what can policy do?

  1. It can try to achieve negative real interest rates by creating expectations of inflation....

  2. Alternatively, governments can step in and spend while the private sector won’t.

  3. Finally, central banks can try to circumvent the zero lower bound.... [W]e only have zero rates at the short end, and it’s possible, though not certain, that you can get at least some traction by buying those longer-term bonds.

But now that we’re in this situation, VSPs around the world are objecting to all of these possible actions. Inflation targets are horrible because we must have price stability. Fiscal policy is unacceptable because we must have balanced budgets. QE is outrageous because that’s not what central banks are supposed to do.

Notice that in each case the objection is based on a shibboleth. Price stability is treated as an absolute virtue, without any model to explain why. The same with budget balance. And those who are horrified at the idea of expansionary monetary policy have been inventing concepts on the fly to justify their position.

The simple fact is that we have a global excess supply of savings, which is doing terrible things to workers. The reasonable thing is to do something about it; it’s deeply unreasonable, and deeply irresponsible, to invent reasons not to act...