Comment of the Day: Robert Waldmann: "I bore myself, but you don't bore me. After charging the Karl-Smithian red cape, I snorted and pawed and read the rest of the speech.

It is brilliant.

I have some other thoughts:

  1. The short term, which is not your topic. You don't discuss Dean Baker's view that reduced trust in intermediaries was a temporary problem, and not key to the sluggish recovery. His view is that it wouldn't have been very different if Lehman had understood its derivative book. In other posts, you note his view with respect. It is not the topic here.

  2. The political economy of central banks which serve the very narrow interests of commercial banks. I worry that this extremely important issue is also off topic. Your topic is the medium run which you interpret as assuming the economy doesn't hit the ZLB. Then in this point 1, you argue that the target inflation rate is too low. Why does the target inflation rate matter if the economy doesn't hit the ZLB ? I guess you could appeal to the other zero, downward nominal wage rigidity and a resulting downward sloping long run Phillips curve. I agree you won't have time (or didn't have time -- has the conference happened already ?) to discuss this, and it is good to briefly raise the issue of tight money bias and all that. I think your point 1 is perfect given the time constraint.

  3. I see that preventing bubbles has been promoted to join dealing with public goods and inequality. I see this as a medium discrete declaration of victory. The 401(k) issue is huge. The case for big government is strong. I would add one thing--reinventing reinventing government. It seems to me that government failure is especially extreme exactly where the state meets the market and low salary bureaucrats deal with the high salary managers of contractors or regulated firms while standing next to the revolving door. This means that outsourcing can reduce efficiency (outsourcing diplomat protection to Blackwater didn't work out very well).

  4. On debt. I still don't agree. The reason is that I think you are implicitly assuming Ricardian equivalence. I believe if it is assumed that the economy won't fall into a liquidity trap, then public debt should be reduced. The reason is that I don't believe in Ricardian equivalence--I think public debt crowds out private investment when the economy isn't in the liquidity trap. I think you implicitly assume Ricardian equivalence. On this and point 2, the political economy of central banking, I think you are unable to force yourself to 'move, in our imagination at least... into a world in which short-term safe nominal interest rates rarely if ever hit the zero nominal bound'.

I certainly do agree with the last part about risks and, in particular, agree that 'It is large-scale borrowing in harder currencies--or writing unhedged puts on your currency--that is the source of real trouble.'