Grasping Reality on TypePad, by Brad DeLong

I pulled from http://krugman.blogs.nytimes.com the posts that Paul Krugman wrote between Jan 1 2009 and Jan 31 2009 about fiscal stimulus.

I found eleven.

In those eleven, I found Krugman making six arguments:

1. In normal times, we don't need fiscal stimulus in a recession because the central bank can use the superior tool of cutting interest rates. But now it can't--hence the need for the ARRA (Jan 17) (Jan 19) (Jan 26).

2. Whether financial markets lose faith in the creditworthiness of the U.S. government depends on expectations of long-run health-care spending relative to taxes, not whether the ARRA is $300B or $800B (Jan 5).

3. The arguments that the ARRA is a bad idea because of the debt burden or because the government will get low value for its money are serious arguments. But conservative economists like Becker, Cochrane, Fama, and Taylor aren't making the serious arguments but rather very silly and incoherent arguments (Jan 19) (Jan 27) (Jan 28).

4. The fact that the multiplier was low during WWII does not mean it is likely to be low now (Jan 22) (Jan 23).

5. Because the economy is likely to be at the zero lower bound for a while, the ARRA should last for several years at least (Jan 27).

6. The need for the ARRA is made greater by the possibility that deflation might take hold (Jan 30).

You write: "Krugman and his admirers were at the forefront in casting discussion of the stimulus in left vs. right terms."

I did not find Krugman talking about left vs. right--it's all about getting demand back up again so the economy can return to full employment in his posts on http://krugman.blogs.nytimes.com in Jan 09.

You write: "For many Democrats, the top priority in the fiscal-policy discussion was not, in fact, to make the stimulus bigger but to reverse the Bush high-income tax cuts"

I did not find Krugman talking about reversing the Bush high-income tax cuts in any of his posts on http://krugman.blogs.nytimes.com in Jan 09.

You write: "[Krugman aimed] to make sure that the composition of the stimulus, whatever its size, as far as possible favored higher spending over lower taxes…. [T]heory and evidence [do] suggest that the spending multiplier is higher than the tax-cuts multiplier…. But, the point is, you don’t have to choose one or the other. An apolitical Keynesian would want as much of both as possible."

I did not find Krugman talking about the importance of spending increases as opposed to temporary tax cuts as stimulus in any of his posts on http://krugman.blogs.nytimes.com in Jan 09. (He does condemn John Taylor for wanting to use the crisis to pass permanent tax cuts.)

As you admit, if you have a limited amount that you are willing to let the debt rise as a result of your stimulus program, you should seek a spending-heavy rather than a tax-heavy stimulus.

You write: "[Krugman] argued [yesterday that] the debate over the fiscal stimulus has nothing to do with the proper scale and scope of government--an issue on which he seems to concede (somewhat to my surprise) that reasonable people may disagree…. It’s stunningly disingenuous of Krugman… to take this line…. Krugman… [was] at the forefront in casting discussion of the stimulus in left vs. right terms."

I have gone through a month of Krugman's posts on http://krugman.blogs.nytimes.com and found no sign of Krugman "casting discussion of the stimulus in left vs. right terms".

What writings of Paul Krugman's did you reread before you wrote your column?

Am I being wrong in thinking that you did not go through any? I do think that if you had gone through any and found anything even half-supporting what you claim, you would have quoted it, wouldn't you? And I notice only one pair of quotation marks in what you wrote--scare quotes around "screed".

Brad DeLong

1. Faith-Based Macroeconomics (Jan 5) http://krugman.blogs.nytimes.com/2009/01/05/faith-based-macroeconomics/ Willem [Buiter] is a smart guy, and he’s raising concerns about the US long-term [debt] position that I also have, although not to the same extent. I don’t have time right now for a full numbers post, but here’s the preview: Willem is saying that America’s “exorbitant privilege”, its ability to borrow more cheaply than it lends, won’t last — which is probably true; but he’s also saying that this would be a devastating blow to the US economy, which I don’t think the numbers support. But on the stimulus point: even if you’re deeply concerned about America’s future solvency, will going for, say, a $300 billion stimulus rather than an $800 billion stimulus do anything significant to help?

2. Zero lower bound blogging (Jan 17) http://krugman.blogs.nytimes.com/2009/01/17/zero-lower-bound-blogging/: The problem, of course, is that you can’t cut interest rates below zero (if you try, lenders will just hoard cash.) So the Fed simply can’t do what the rule says it should. This is why we need a huge fiscal stimulus, unconventional monetary policy, and anything else you can think of to fight this slump. Quite literally, the usual rules no longer apply.

3. Getting fiscal (Jan 19) http://krugman.blogs.nytimes.com/2009/01/19/getting-fiscal/: the reason we’re all turning to fiscal policy is that the standard rule, which is that monetary policy plus automatic stabilizers should do the work of smoothing the business cycle, can’t be applied when we’re hard up against the zero lower bound.

4. Economists, ideology, and stimulus (Jan 19) http://krugman.blogs.nytimes.com/2009/01/19/economists-ideology-and-stimulus/: There are certainly legitimate arguments against spending-based fiscal stimulus. You can worry about the burden of debt; you can argue that the government will spend money so badly that the jobs created are not worth having; and I’m sure there are other arguments worth taking seriously. What’s been disturbing, however, is the parade of first-rate economists making totally non-serious arguments against fiscal expansion. You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems. You’ve got John Cochrane going all Andrew-Mellon-liquidationist on us. You’ve got Eugene Fama reinventing the long-discredited Treasury View. You’ve got Gary Becker apparently unaware that monetary policy has hit the zero lower bound. And you’ve got Greg Mankiw — well, I don’t know what Greg actually believes, he just seems to be approvingly linking to anyone opposed to stimulus, regardless of the quality of their argument. Needless to say, everyone I’ve mentioned is politically conservative. That’s their right: economists are citizens too. But it’s hard to avoid the conclusion that all of them have decided on political grounds that they don’t want a spending-based fiscal stimulus — and that these political considerations have led them to drop their usual quality-control standards when it comes to economic analysis.

5. War and Non-Remembrance (Jan 22) http://krugman.blogs.nytimes.com/2009/01/22/war-and-non-remembrance/: As I’ve already pointed out,the prospect of a Keynesian stimulus is having a weird effect on conservative economists, as first-rate economists keep making truly boneheaded arguments against the effort. The latest entry: Robert Barro argues that the multiplier on government spending is low because real GDP during World War II rose by less than military spending. Actually, I’ve already taken that one on. But just to say it again: there was a war on. Consumer goods were rationed; people were urged to restrain their spending to make resources available for the war effort. Oh, and the economy was at full employment — and then some. Rosie the Riveter, anyone?

6. Spending in Wartime (Jan 23) http://krugman.blogs.nytimes.com/2009/01/23/spending-in-wartime/: Robert Barro made much of the fact that private spending actually went down during World War II — which he took as evidence of “crowding out”. But what types of private spending fell, and why? Well, the chart below, drawn from Millennial Historical Statistics, shows spending on new homes and cars before, during, and after the war years. Both basically collapsed. Why? The answer is that (1) There were draconian building restrictions in effect — in fact, the end of those restrictions helped set off the postwar housing boom, and (2) new cars weren’t being produced, because the factories were making tanks instead (and if you did manage to acquire a car somehow, gasoline was rationed). Why anyone thinks that private spending during those years is a model for what will happen as a result of fiscal stimulus now is beyond me.

7. What's in a Name? (Jan 26) http://krugman.blogs.nytimes.com/2009/01/26/whats-in-a-name/: Now, if you prefer a different definition of a liquidity trap, OK; call our current situation a banana, instead. But changing the name does not change the essential fact — namely, conventional monetary policy has lost effectiveness. Yes, there are other things the Fed could do — and it’s doing them, on an awesome scale. But they’re controversial, precisely because, unlike conventional monetary policy, they involve picking and choosing among potentially risky investments. And there’s a much stronger case for fiscal policy than in normal times, because we don’t know how well these unconventional measures will work.

8. How late is too late? (Jan 27) http://krugman.blogs.nytimes.com/2009/01/27/how-late-is-too-late/: So what is the right criterion? Actually, I think it’s quite straightforward. The reason we’re talking about fiscal policy is the fact that monetary policy is up against the zero lower bound. Stimulus will still be valuable as long as we’re still up against that bound — which is likely to be the case for a long time.

9. A Dark Age of macroeconomics (wonkish) (Jan 27) http://krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish/: The knowledge that S=I doesn’t imply the Treasury view — the general understanding that macroeconomics is more than supply and demand plus the quantity equation — somehow got lost in much of the profession. I’m tempted to go on and say something about being overrun by barbarians in the grip of an obscurantist faith, but I guess I won’t. Oh wait, I guess I just did.

10. Fiscal policy formalities (wonkish) (Jan 28) : There seems to be an amazing amount of misunderstanding of the basics of fiscal policy, even among people who should know better. Leave on one side the remarkable parade of economists who think that the savings-investment identity proves that government action can’t increase spending; PGL points us to a higher-level fallacy: the widespread belief that Ricardian equivalence doesn’t just say that tax cuts have no effect — which it does — it also says that private consumption automatically offsets any rise in government spending, which is just wrong.

11. Damnification (Jan 30) http://krugman.blogs.nytimes.com/2009/01/30/damnification/: The really scary report today wasn’t the GDP release, although that was plenty bad, but the employment cost index, which shows wage gains falling off fast. Wages aren’t declining, yet (although stories of wage cuts in particular firms are, I believe, more common than at any time since the 1930s); and we don’t have actual deflation in consumer prices, yet; but we’re moving in that direction. And we’re only in the early stages of a slump that, in the words of the CBO director, "absent a change in fiscal policy, CBO projects that the shortfall in the nation’s output relative to potential levels will be the largest–in duration and depth–since the Depression of the 1930s." This really should be the key point in the stimulus debate. Yes, the effects of fiscal policy are uncertain; yes, running up large debts is risky; but doing nothing is even riskier, because there’s a high probability that if we don’t act strongly deflation will get embedded in the economy. We may be damned if we do, but we’ll almost surely be damnified if we don’t.