Must-Read: Paul Krugman (2008): The Rogoff Doctrine

Must-Read: Paul Krugman (2008): The Rogoff Doctrine: “Ken Rogoff is one of the world’s best macroeconomists. But…

…Ken tells us that: “The huge spike in global commodity price inflation is prima facie evidence that the global economy is still growing too fast.” And then he calls for: “a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels.” Um, why? Basically, the world is employing rapidly growing amounts of labor and capital, but faces limited supplies of oil and other resources. Naturally enough, the relative prices of those resources have risen–which is the way markets are supposed to work…. Presumably there’s some implicit argument in the background about why a sharp rise in the relative price of oil is more damaging than leaving labor and capital underemployed. But that argument isn’t there in Ken’s recent pieces. Model, please?

I agree that “Dollar bloc countries have slavishly mimicked expansionary US monetary policy” and that’s a real issue: the Fed is pursuing very loose policy to deal with a US financial crisis, and that’s inflationary in countries that are pegged to the dollar without facing our problems. But that’s an argument for breaking up Bretton Woods II; it’s not an argument for tighter Fed policy. Since this is coming from Ken Rogoff, I assume that there’s some deeper analysis here. But I can’t infer it from the articles I’ve read. Please, sir, can I have some more?