Must-Read: Paul Krugman (2015): Insiders, Outsiders, and U.S. Monetary Policy

Must-Read: As I periodically say, there are two rules that would have made me much smarter had I adopted them back in, say, 1996:

  1. Paul Krugman is right.
  2. If you think Paul Krugman is wrong, consult rule #1.

May I have unanimous consent on the proposition that Paul Krugman was right back at the start of 2015 on this issue?:

Paul Krugman (2015): Insiders, Outsiders, and U.S. Monetary Policy: “I ran into Olivier Blanchard over breakfast… in Hong Kong…

…Many of the people who either make monetary policy or comment on it from fairly influential perches are members of what you might call the 1970s Cambridge mafia… most of this group shares fairly similar views…. Which brings me to the point. Unusually, Olivier and I do have a significant disagreement right now, over US monetary policy…. I’m very worried that the Fed may be gearing up to raise rates too soon; he’s sanguine, considering the risk of a Japan-type trap in the US minimal and the case for a rate hike this year solid…. Our disagreement… is part of a wider split…. There’s a surprisingly sharp divide over near-term US monetary policy. And the divide seems to depend on one thing: whether the economist in question is currently in a policy position….

So why this divide? We don’t have access to different facts; we don’t, in any fundamental sense, have different economic models. It’s an uncertain world, but why do those in office come down on one side of that uncertainty, while those outside come down on the other? Well, even smart, flexible people can fall prey to incestuous amplification. And I worry that this is what is happening to the insiders. On the whole, it seems less likely for the outsiders, although it’s true that the Keynesian econoblogs form what amounts to a tight ongoing discussion group…. But if you ask me, there’s a worrying complacency among the insiders right now, and I would urge them to consider the potential consequences if they’re wrong.

And this is why I find myself worrying that this today is also much too sanguine. The very sharp Olivier Blanchard argues that it is not too sanguine:

Our goal was less ambitious and more realistic. It was to see if the eurozone could function and handle shocks without further political integration if political realities made it impossible for the time being. Our answer is a qualified yes, but it is surely not an endorsement of a do-nothing strategy…

But I think back to the start of 2015. And I remember the two rules that would have made me look like a fracking genius if I had been smart enough to adopt them back in 1996…

June 28, 2016


Brad DeLong
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