Evening Must-Read: Paul Krugman: Liquidationism in the 21st Century

Paul Krugman: Liquidationism in the 21st Century: “The BIS position has basically been the same…

…as that of 1930s liquidationists like Schumpeter, who warned against any ‘artificial stimulus’ that might leave the ‘work of depressions undone’. And in 2010-2011 it had an intellectually coherent–actually wrong, but coherent–story underlying that position… that mass unemployment was the result of structural mismatch…. It therefore claimed that easy money would lead to a rapid rise in inflation, despite the high level of unemployment. But it didn’t happen. So… it… look[ed] for new justifications for the same [policy] prescriptions… playing up the supposed damage low rates do to financial stability….

That over-indebtedness on the part of part of the private sector is exerting a persistent drag on the economy… is a reasonable story…. But the BIS either doesn’t understand that model’… as if they were equivalent to… real structural problems… a good reason to accept a protracted period of high unemployment as somehow natural, and to reject artificial stimulus…. That, however–as Irving Fisher could have told them!–is not at all the correct implication to draw from a balance-sheet view…. The balance-sheet view… makes a compelling case for… fiscal deficits to support demand while the private sector gets its balance sheets in order, for monetary policy to support the fiscal policy, for a rise in inflation targets both to encourage whoever isn’t debt-constrained to spend more and to erode the real value of the debt.

The BIS, however, wants governments as well as households to retrench… and–in a clear sign that it isn’t being coherent–it includes a box declaring that deflation isn’t so bad, after all. Irving Fisher wept…. Are the BIS’s methods unsound? I don’t see any method at all. Instead, I see an attitude, looking for justification…