But I don't think that he is.
I think Greg Mankiw knows why people think that helping George W. Bush create long-term structural deficits in 2003 was a bad thing to do.
I think Greg Mankiw knows perfectly well why people think that now--at the zero lower bound, with the employment-to-population ratio below 57%--larger short-term Keynesian cyclical deficits are a good thing. And I think Greg Mankiw knows perfectly well that there is no inconsistency in arguing that (a) monetary policy is the stabilization policy tool of choice in normal times, but (b) fiscal policy has a use when monetary policy hits the zero lower bound.
Thus I do not believe Greg Mankiw is really puzzled at all.
Paul Krugman Changed His Mind On Bond Vigilantes: Anyway, economist Greg Mankiw has called out Krugman (via @dutch_book) for contradicting himself — specifically something Krugman said back in 2003, when Bush was the President, and the deficit was huge, and Krugman was warning about it.
I am having trouble reconciling these points of views. Has Paul changed his mind since 2003 about how the bond market works? Or are circumstances different now? If anything, I would have thought that the fiscal situation is more dire now and so the logic from 2003 would apply with more force. I am puzzled.
In 2003 the unemployment rate peaked at 6%, the employment-to-population ratio troughed at 62%, and short-term safe nominal interest rates never hit the zero lower bound. In this business cycle the unemployment rate peaked at 10%, the employment-to-population ratio troughed at 56.5%, and the short-term safe nominal interest rate has now been at its zero lower bound for four years and is now expected to remain at the bound for three more.
The rule of thumb has two parts. First, unless you hit the zero lower bound on interest rates the business cycle should be handled by monetary policy, and fiscal policy should be conducted upon "classical" principles: set tax rates and spending programs so that the debt-to-GDP ratio converges to a sustainable target level, where the target takes into account the fact that you will want to run large budget deficits in (a) wars, (b) depressions in which interest rates hit the zero lower bound, and (c) other national emergencies.
Second, when you do hit the zero lower bound, "Keynesian" principles should govern fiscal policy: borrow and spend to boost production and employment as long as inflation expectations remain anchored.
There is nothing to puzzle over here.
So why Mankiw's claim of puzzlement?
Remember the context: Mankiw loved the Bush-era fiscal policies to create long-run structural budget deficits, and worked hard to implement them--the unfunded war and unfunded tax cut and unfunded entitlement policies that did so much to create our structural deficit. Mankiw did his best to join in the process of taking the work that we in the Clinton administration had done in the 1990s to restore America's fiscal balance--work that was very well done, very important, and work that we were and are very proud of--and casually smashing it on the floor.
That was not a good thing to do.
I so understand how people who did not go into private internal or public external opposition to Bush-era economic policies when they were enacted might wish that the analytical case against them were not as strong as it is. But increasing confusion by failing to recognize distinctions about when deficits are appropriate macroeconomic policy and when they are not does not help anybody.