Tag: Paul Krugman

Brexit: I Think Paul Krugman Is Confused Here…

Posted on by Brad DeLong
Interest Rates Government Securities Treasury Bills for United Kingdom© FRED St Louis Fed

Bearing in mind what has happened to me almost every single time since 1997 when I have concluded that Paul Krugman is wrong…

The key, I think, is something hidden in Paul’s column. It is the fact that the effect of pretty much any shock depends on what the private financial market and the public monetary and fiscal policy response to it is:

Paul Krugman: Still Confused About Brexit Macroeconomics: “OK, I am still finding it hard to understand the near-consensus among my colleagues…

…about the short- and medium-term effects of Brexit…. [While] Brexit will make Britain somewhat poorer in the long run, it’s not completely obvious why this should lead to a recession in the short run…. So let me give an example of the kind of analysis that I think should raise eyebrows: BlackRock…. “‘Our base case is we will have a recession’, Richard Turnill, chief investment strategist at the world’s largest asset manager, told reporters…. ‘There’s likely to be a significant reduction of investment in the UK,’ he said, adding that Brexit will ensure political and economic uncertainty remains high…

When we say ‘uncertainty’, what do we mean? The best answer I’ve gotten is that for a while, until things have shaken out, firms won’t be sure where the good investment opportunities in Britain are, so there will be an option value to waiting… Brexit might have seriously adverse effects on service exports from the City of London. This would mean that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in industrial properties in the north of England more attractive. But you don’t know how big either effect might be. So both kinds of investment are put on hold, pending clarification.

OK, that’s a coherent story, and it could lead to a recession next year. At some point, however, this situation clarifies. Either we see financial business exiting London, and it becomes clear that a weak pound is here to stay, or the charms of Paris and Frankfurt turn out to be overstated, and London goes back to what it was. Either way, the pent-up investment spending that was put on hold should come back. This doesn’t just mean that the hit to growth is temporary: there should also be a bounce-back…. But that’s not what BlackRock, or almost anyone else, seems to be saying; they’re projecting lower growth as far as the eye can see. They could be right. But I still don’t see the logic. It seems to me that ‘uncertainty’ is being used as a catchall for ‘bad stuff’.

When asset managers–indeed, when anyone anywhere in the world who is not a trained economist–uses the phrase “more uncertainty”, they do not mean what me trained (or mistrained) economists mean: they do not mean that the future distribution of the random variable has a larger variance but the same mean. What they mean, instead, is that the distribution has a larger and longer lower tail. The variance is up and the mean is lower. The principal thing they see as pushing down investment in the near future is the fear of this lower tail–not capitalizing on the option value of waiting until more knowledge comes in.

Back in 1992 Britain exited the ERM. ERMexit had two effects: (1) a small reduction in the desirability of locating in Britain to serve the continental European market because one now faced exchange rate risk, and (2) a large easing of conventional monetary policy and thus lower interest rates and a lower value of the pound because the Bank of England no longer had to maintain the pound at an overvalued parity. The result: boom.

Today Brexit looks to have two effects: (1) a large reduction in the desirability of locating in Britain to serve the continental European market, and (2) ???? (we are not going to get a large easing of conventional monetary policy):

Interest Rates Government Securities Treasury Bills for United Kingdom© FRED St Louis Fed

In a proper neoclassical flex-price zero-debt world that was, somehow, at the zero lower bound on nominal interest rates, the response to Brexit would be to bounce the real value of the pound down and to bounce the internal price level down and follow that bounce with higher inflation. The much more strongly negative real interest rate produced by the price level bounce-down-followed-by-inflation would cushion the decline in investment. And the boost to exports from the bounced-down real value of the pound would soak up workers exiting investment-goods industries and maintain full employment.

Of course, the proper neoclassical flex-price zero-debt world is one in which the full operation of Say’s Law is a metaphysical necessity, and so full employment is always attained. We, however, do not live in a proper neoclassical flex-price zero-debt world. It is the job of fiscal and monetary authorities to follow policies that push real prices–real exchange rates, real interest rates, real wage levels–to the values that would obtain in such a world, and so preserve full employment. We can imagine:

*1. Expansion of government purchases: preserve full employment by replacing I with G. Not going to happen in any Britain ruled by anything like this generation of Tories.
2. A helicopter drop: the Bank of England buys bonds for cash, cancels the bonds, and the government cuts taxes by the amount of cancelled bonds. Might happen even with this generation of Tories if they were less thick. But they seem to be very thick indeed.
3. Continued whimpers from Mark Carney that he would not chase away the Inflation-Expectations Imp were she to somehow appear. Not likely to be effective.
4. Everybody becomes so terrified about the safety of their assets in Britain that the real value of the pound bounces low enough that expanding exports soak up all of labor exiting from investment-goods industries.

Paul seem to be betting that (4) is a real live high-probability possibility: the short-term safe real interest rate is pinned at -2%/year for the foreseeable future, but the pound will bounce low enough for expanded exports to preserve full employment. It could happen–the world is a surprising place. But that possibility seems to me to be a tail possibility, not something that should be at the core of one’s forecast.

Must-Read: Paul Krugman: Cheap Money Talks

Posted on by Brad DeLong

Must-Read: Paul Krugman: Cheap Money Talks: “Late last year the yield on 10-year U.S. government bonds was around 2.3 percent, already historically low…

…on Friday it was just 1.36 percent…. Some… blame the Federal Reserve and the European Central Bank, accusing them of engineering ‘artificially low’ interest rates that encourage speculation and distort the economy… largely the same people who used to predict that budget deficits would cause interest rates to soar…. They’re not making sense….‘Artificially low’ mean[s]… excessively easy money… [what generates] out-of-control inflation. That’s not happening…. If anything, developments in the real economies of the advanced world are telling us that interest rates aren’t low enough….

But why? In some past episodes… the story has been one of a flight to safety…. But there’s little sign of such a fear-driven process now…. Most famously Larry Summers, but also yours truly and others… [say] weak demand and a bias toward deflation are enduring problems… [no] return to what we used to consider normal…. Low short-term interest rates for a very long time, and [so] low long-term rates right away….

Raising rates in the face of weak economies would be an act of folly…. What policy makers should be doing, instead, is accepting the markets’ offer of incredibly cheap financing…. There are huge unmet demands for public investment on both sides of the Atlantic…. This would be eminently worth doing even if it wouldn’t also create jobs, but it would do that too…. Deficit scolds would issue dire warnings…. But they have been wrong about everything for at least the past eight years, and it’s time to stop taking them seriously. They say that money talks; well, cheap money is speaking very clearly right now, and it’s telling us to invest in our future.

Must-Read: Storify: Paul Krugman Is, I Think, Highly Likely to Be Correct on the Policy Irrelevance of the Risk Premium. The Mystery Is Why the Very Sharp Ken Rogoff Takes a Different View…

Posted on by Brad DeLong

Must-Read: Storify: Oh Noes! Paul Krugman Has Caught the Tweetstorm Disease!: “Paul Krugman Is, I Think, Highly Likely to Be Correct on the Policy Irrelevance of the Risk Premium. The Mystery Is Why the Very Sharp Ken Rogoff Takes a Different View…

Must-Read: Paul Krugman: The Great Capitulation

Posted on by Brad DeLong

Must-Read: Paul Krugman: The Great Capitulation: “On Friday, the U.S. 10-year closed at 1.36, almost a hundred basis points down from its level on Dec. 15…

…when the Fed made what was supposed to be the first of many rate hikes…. It’s all pretty awesome. What’s it all about? People are still out there blaming central banks for imposing “artificially low” rates, which is kind of amazing and depressing. Artificially low compared to what? If central banks were engaged in excessive monetary ease, the results should be visible in the form of rising inflation–which was in fact what the critics of QE claimed would happen. But it didn’t, and now I have no idea what their criterion for a not-artificially low rate is….

There is no indication this time around of a flight to safety…. We don’t seem to be looking at a risk-off situation, with government bonds as a safe haven.
What’s consistent with the data… is the notion that investors are throwing in the towel and accepting secular stagnation as the new normal. Almost 8 years after Lehman, no sign of a really strong recovery in sight anywhere; perceived private-sector investment opportunities remain weak. Stock and land prices are pretty high, but probably because of low discounting rather than expected high returns.

Call it the Great Capitulation.

Must-Read: Paul Krugman: Trade and Jobs: A Note

Posted on by Brad DeLong

Must-Read: Ah. I’ve been waiting for Paul Krugman to write up something like this…

I think that he is, of course, correct. The estimated effects of the China shock on individual regions and labor markets is solid. Their aggregating up is fatally flawed pre-2008…

Paul Krugman: Trade and Jobs: A Note: “Trade and jobs… The big story in the academia/policy space…

…Autor et al… estimated large losses from Chinese import penetration…. But… some conceptual issues… are important for interpreting the results…. I would begin by posing a counterfactual: what would U.S. employment look like if we had pursued policies such as Trump tariffs that prevented the large trade deficits in manufacturing we actually have?… A balanced expansion of imports and imports would have, to a first approximation, no effect on manufacturing value added, and an effect on employment only to the extent that import-competing industry is more labor-intensive than exports…. [So] what matters is the manufacturing trade deficit… $600 billion in 2014. How much manufacturing did that deficit displace?… About $360 billion…. 2 million jobs.

OK, what about the effect on overall employment?… If monetary and fiscal policy are used to achieve a target level of employment–as they generally were prior to the 2008 crisis–then a first cut at the impact on overall employment is zero. That is, trade deficits meant 2 million fewer manufacturing jobs and 2 million more in the service sector. Since 2008, of course, we’ve been in a liquidity trap, with the Fed either unable or unwilling to hit its targets and fiscal policy paralyzed by ideology, so trade deficits are in practice a major drag on overall employment…. So, how big a deal is displacement of 2 million manufacturing jobs? Not trivial…. But… absent the trade deficit… we would have roughly 11.5 percent of the work force in manufacturing, rather than the actual 10. Compare this with the realities of the past: more than 20 percent in manufacturing in the late 1970s, more than 25 percent in the 1960s….

Autor and various co-authors… do… a bottom-up approach…. The impact of the China shock on employment, wages, and so on at the regional level… beautiful work. But what they do next is to apply the implied coefficient from this analysis to the aggregate effects of the China shock. And that’s much more dubious–especially when, in the second paper, they purport to estimate the effects on overall employment. In general, you can’t do that: applying estimates of partial regional effects to the overall aggregate exposes you to huge possible fallacies of composition. And in this case the crucial issue is monetary and fiscal response. Up through 2007… [their results] should be seen as jobs shifted out of manufacturing to other sectors, not total job loss…

Time to Play Whack-a-Mole with the Expansionary-Austerity Confidence-Fairy Zombie Once Again!

Posted on by Brad DeLong

Four readings on the expansionary austerity zombie:

Reading #1: Paul Krugman (2015):

Paul Krugman: Views Differ on Shape of Macroeconomics (2015): “The doctrine of expansionary austerity…

…the claim that slashing spending would actually boost demand and employment, because it would have such positive effects on confidence that this would outweigh the direct drag–was immensely popular among policymakers in 2010, as the great turn toward austerity began. But the statistical underpinnings of the doctrine fell apart under scrutiny: the methods Alberto Alesina used to identify changes in fiscal policy did not, it turned out, do a very good job, and more careful work found that historically austerity has in fact been contractionary after all. Moreover, the experience of austerity programs seemed to confirm what Keynesians new and old had warned from the beginning–that the negative effects of austerity are much larger under conditions where they cannot be offset by conventional monetary policy. So at this point research economists overwhelmingly believe that austerity is contractionary (and that stimulus is expansionary)…. For now at least expansionary austerity has virtually collapsed as a doctrine taken seriously by researchers. Nonetheless, Simon Wren-Lewis points us to Robert Peston of the BBC declaring

I am simply pointing out that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly persuaded they’ve won this match–and take the somewhat patronising view that voters who think differently are ignorant sheep led astray by a malign or blinkered media).

Wow. Yes, I suppose that ‘there is a debate’ — there are debates about lots of things, from climate change to evolution to alien spaceships hidden in Area 51. But to suggest that this debate is at all symmetric is just wrong — and deeply misleading to one’s audience. As for the claim that it’s somehow patronizing to suggest that voters are ill-informed when (a) macroeconomics is a technical subject, and (b) the media have indeed misreported the state of the professional debate — well, this is sort of an economic version of the line that one must not suggest that the Iraq war was launched on false pretenses, because this would be disrespectful to the troops. If you’re being accused of misleading reporting, it’s hardly a defense to say that the public believed your misinformation — more like a self-indictment…

The question to which “expansionary austerity” was relevant was never: can one substantially reduce the budget deficit without risking substantial recession? The answer to that was always yes: if fiscal contraction is supported by monetary expansion a outrance the decline in government purchases from spending reductions and in consumption spending from tax increases can be offset and more than offset by higher exports and higher investment spending. That is and has been standard Keynesian doctrine since the 1950s, at least. (Cf. the Economic Report of the President chapter that Robert Solow drafted in the early 1960s.)

The novelty of Alesina’s claim was not that monetary offset can neutralize the short-run contractionary effect of fiscal austerity. It was, rather, that summoning the Confidence Fairy could and many times had neutralized the short-run contractionary effect of fiscal austerity.

The question to which “expansionary austerity” purported to give the answer was: At the zero lower bound, where attempts to stimulate the economy through expansionary monetary policy have greatly reduced traction and are fraught, is the connection between lower deficits and more optimistic business animal spirits strong enough that one can one substantially reduce the budget deficit without risking substantial recession?

And back in 2010 Alberto Alesina very strongly said that the answer to that was “yes”: Reading #2:

Alberto Alesina: Fiscal Adjustments: Lessons from Recent History

Many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run. These are the adjustments which have occurred on the spending side and have been large, credible and decisive…. Governments which have initiated thorough and successful fiscal adjustment policies have not systematically suffered at the polls… especially… when the electorate has perceived the sense of urgency of a crisis or in some cases in the presence of an external commitment. On the contrary, fiscally-loose governments have suffered losses at the polls…. Thus relatively painless (economically and politically) fiscal adjustments might be possible; whether government will take the opportunity remains to be seen…

“Many” and “even sharp” have been “immediately followed” because adjustments that “have been large, credible and decisive” and “have occurred on the spending side” have summoned the Confidence Fairy. Thus governments should “take the opportunity” for the “relatively painless (economically and politically) fiscal adjustments” that “might be possible” via expansionary austerity.

This was pretty much completely wrong. Many of Alesina’s adjustments were not policy adjustments at all–but rather unplanned side-effects of booms driven by other factors. The rest appeared, to me at least, to be due to the kind of expansionary monetary policy offset that the Clinton administration had planned and carried out over 1993-6 and that was not possible at the zero lower bound.

Nevertheless, it appears that Alesina is sticking to his guns here: Reading #3:

Alberto Alesina (2016) Fiscal Policy and Austerity: “Well, I think Paul Krugman has rather extreme views…

…But more importantly, he talks about his views as if they were obviously true, and anybody who would disagree with him was obviously wrong. And he exaggerates. And that I really prefer not to go into a discussion about his quotes.

But I think that the idea that the work about austerity that I and others have done has been discredited is wrong. In fact, the IMF, in 2010 wrote a rather pointed criticism about my work…. [The IMF’s] second point is whether whether there are cases where spending cuts accompanied by other policies can be expansionary, and the confidence argument that he makes fun of is actually confidence, one of the many aspects; and we can elaborate on that. But I think that there are several episodes in which fiscal spending cuts have been accompanied not by a recession, but by an expansion. So, I think that those kind of statements by Krugman are trying to push a view which is respectable but they are not proven by the facts. Or at least they are not supported by research….

I do think that confidence is important, because we have empirical evidence suggesting that when there are spending cuts, the confidence of investors actually goes up, and the confidence of consumers goes down very little; while with tax increases, confidence of both consumers and business investors goes down quite a bit in many countries. So confidence has played a role. And then, there are many–as I said, austerity plans are a combination of many, many other policies. So, it matters what monetary policy does. It matters that sometimes, particularly in European countries, when there is a crisis and austerity is called for, then there is a productive opportunity to engage in other so-called “structural reform”–labor market reform and goods market reform, liberalization of various sectors, which help and that indeed has spurred growth. And of course monetary policy matters–we are saying in a situation which monetary policy is supportive and expansionary, that helps fiscal adjustment. So these are just the more important of many other factors which are left out from the basic Keynesian model…

My view: Alberto should simply not be saying this. If you want to claim that the Confidence Fairy channel–rather than the monetary offset channel–is important, you bring forward at least one regression or at least one case study in which a sharp, large, credible, and decisive policy of fiscal austerity has been rapidly followed by a substantial improvement in business confidence which then immediately drives sustained growth. If you don’t have that regression or that channel–if what you have is monetary-policy offset plus misspecification of your right hand-side variable–you do not have an economic argument.

Reading #4:

Franklin Delano Roosevelt (1933): First Inaugural Address: “our distress comes from no failure of substance. We are stricken by no plague of locusts…

…Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated…. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish…

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

Posted on by Brad DeLong

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…

Must-Read: Paul Krugman: Against Eurotimidity

Posted on by Brad DeLong

Must-Read: Paul Krugman: Against Eurotimidity: “The authors really are the best and brightest…. So I’d really like to say nice things…

…Unfortunately… is this really all they can offer? I understand that in the effort to reach consensus one must trim back the more intellectually daring and politically difficult parts of what an individual economist might propose. But in this case the search for consensus seems to have leached out practically all the substance…. They’re calling for liquidity support in times of crisis, and I think debt relief if necessary. But that’s sort of how Europe is already trying to muddle through. They don’t call for fiscal integration; they don’t even call for a euro-wide system of deposit insurance. I’m really not sure what they are proposing, beyond neatening up the organization chart. They allude to the possibility of secular stagnation, which some of us consider a clear argument for fiscal stimulus and higher inflation targets. But all they suggest is… structural reform, the universal elixir of elites.

The only really new thing I thought I saw was the declaration that “the level of expenditure – rather than the deficit – is the main problem” coupled with a call for expenditure rules. But where is that coming from? There is no correlation between economic performance in the euro crisis and the level of government spending as a share of GDP — Austria has a big government, Ireland and Spain small ones by European standards. And absent some clear evidence that big G was the problem, why declare that national sovereignty on the size of the public sector must be reduced?… From a macro perspective, Europe is a depressed economy with inflation well below a reasonable target, desperately in need of more demand, with this aggregate problem exacerbated by the problems of adjustment within a single currency. And here we have a manifesto calling for smaller government and structural reform. The authors of the manifesto aren’t neoliberal ideologues. So what happened?

Must-Read: Paul Krugman: Brexit: The Morning After

Posted on by Brad DeLong

Must-Read: I disagree with Paul Krugman: not “Brexit just brings to a head an abscess that would have burst fairly soon in any case…” but rather: Brexit evolves antibiotic-resistant bacteria and brings to a head an abscess that would probably have drained itself gradually–and could still have been treated…

Paul Krugman: Brexit: The Morning After: “A number of people deserve vast condemnation here, from David Cameron…

…who may go down in history as the man who risked wrecking Europe and his own nation for the sake of a momentary political advantage, to the seriously evil editors of Britain’s tabloids, who fed the public a steady diet of lies. That said, I’m finding myself less horrified by Brexit… than I myself expected. The economic consequences will be bad, but not, I’d argue, as bad as many are claiming…. Brexit will make Britain poorer. It’s hard to put a number on the trade effects of leaving the EU, but it will be substantial…. Assurance of market access has a big effect in encouraging long-term investments aimed at selling across borders; revoking that assurance will, over time, erode trade even if there isn’t any kind of trade war. And Britain will become less productive as a result.

But right now all the talk is about financial repercussions–plunging markets, recession in Britain and maybe around the world, and so on. I still don’t see it. It’s true that the pound has fallen by a lot compared with normal daily fluctuations. But for those of us who cut our teeth on emerging-market crises, the fall isn’t that big…. This is not a world-class shock. Furthermore, Britain is a nation that borrows in its own currency….

Now, it’s true that world stock markets are down; so are interest rates around the world, presumably reflecting fears of economic weakness that will force central banks to keep monetary policy very loose. Why these fears? One answer is that uncertainty might depress investment. We don’t know how the process of Brexit plays out, and I could see CEOs choosing to delay spending until matter clarify. A bigger issue might be fears of very bad political consequences, both in Europe and within the UK…. The European project… is in deep, deep trouble [with] Brexit… probably just the beginning…. Lots of people are now very pessimistic about Europe’s future, and I share their worries. But those worries wouldn’t have gone away even if Remain had won…. At the European level… I would argue that Brexit just brings to a head an abscess that would have burst fairly soon in any case. Where I think there has been real additional damage done, damage that wouldn’t have happened but for Cameron’s policy malfeasance, is within the UK itself…. So calm down about the short-run macroeconomics; grieve for Europe, but you should have been doing that already; worry about Britain.

Must-Read: Paul Krugman: A Question For the Fed

Posted on by Brad DeLong

Must-Read: As I was just saying yesterday: Take the rate of profit–typically 6% to 7% per year–on the operating companies that make up the stock market. Subtract the risk premium–typically 4%. Add on the expected inflation rate–2.5% on the CPI basis. Get 4.5% to 5.5%. That is what the nominal interest rate on Treasury bills is likely to be in normal times toward the end of a healthy expansion. That provides a healthy amount of room for the Federal Reserve to cut interest rates to encourage spending and support the economy when a recession comes. But note that 5% of sea-room to cut interest rates when necessary was not nearly enough back in 2007-2010.

Now suppose that we are entering an age of secular stagnation. It will have a higher risk premium–say 5-6%. Slower growth will have an impact on the rate of profit for operating companies–knock, say, 1-2% off their typical value. Go through the math, and we get a likely nominal interest rate on Treasury in normal times toward the end of a healthy expansion of roughly 1-3%, not 5%.

The dot-plots tell us that the FOMC now thinks that it is headed for a 3% Treasury Bill rate–at the upper end of this range, but still very far from a 5% rate. And if we do live in a semi-permanent age of secular stagnation, this will not be a temporary inconvenience but, rather, a permanent structural fact.

That means that if the FOMC keeps its current inflation target then it will have only 3% of sea-room when the next big recession comes, whether next year, next decade, or a quarter century from now.

That means that if the FOMC keeps attempting to raise interest rates back to a 5% normal–or even, unless it is lucky, to a 3% normal–it will find itself continually undershooting its inflation target, and continually promising that rates will go up more real soon now as soon as the current idiosyncratic fit of sub-2% inflation passes.

I do not know anybody seriously thinking about all this who thinks that 3% of sea-room is sufficient in a world in which shocks as big as 2007-2010 are a thing. And I do not know anybody seriously thinking about all this who thinks that pressing for a premature “normalization” of interest rates is a good idea: It will deanchor inflationary expectations on the downside, and with rational market inflation expectations 1-2% below the “target” that means an equilibrium late-expansion Treasury Bill rate of not 1 to 3% but rather -1 to 2%.

Therefore either (a) the Federal Reserve really should raise its inflation target, or (b) the Federal Reserve should right now be screaming to high heaven about how it is the necessary and proper task of the rest of the government to do something, something big, something now to resolve our secular stagnation problem. And under no circumstances should the Fed be (c) pushing for probably premature “normalization” of interest rates.

Of course, the Fed could and should be doing both (a) and (b). But it seems to be doing neither–it seems to be doing (c).

Perhaps Janet’s thoughts on secular stagnation are part of process of trying to assemble an FOMC coalition to… do something… or at least beg others to do something…

But this intellect, at least, is pretty pessimistc.

A Question For the Fed The New York Times

Paul Krugman: A Question For the Fed: “There is a near-consensus at the FOMC that rates must eventually move up…

….But… exactly?… Which component of aggregate demand do we believe will continue to strengthen in a way that will require monetary tightening to avoid an overheating economy? Here’s a look at two obvious candidates… as shares of potential GDP… deviations from the 1990-2007…. Nonresidential investment has basically recovered from the recession-induced slump. Residential investment is still a bit low by historical standards, but not as much as you might think…. So I don’t see an obvious reason to believe that current rates are too low. Yes, they’re near zero–but that in itself doesn’t mean too low. Like others, notably Larry Summers, I think the Fed is trying to return to a normality that is no longer normal.