Is it us, or is Paul Krugman — economist extraordinaire — becoming increasingly angry that no one is ‘getting’ his deflationista warnings about the economy?
Take the title of his latest blog missive: “It’s the stupidity economy“.
In the post, Krugman derides the mainstream financial world (Niall Ferguson presumably) for encouraging “bad ideas” which are now imposing serious constraints on policy and potentially getting the world into grievous economic Japan-style trouble. (i.e. stupid media, propagating views that inflation might be a problem.)
Simply stated, in Krugman’s mind there’s no denying the US is in a liquidity trap — something which in his opinion calls for ongoing inflationary policy action. Or as Krugman puts it: getting policy action “to commit to higher inflation, so as to reduce real interest rates”. To ensure this, Krugman explains:
. . . the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).
Unfortunately, according to Krugman, we haven’t gotten anywhere near convincing policymakers that an inflationary road-map is the right one. And, with a lack of other tenable alternatives (unless the slump lasts a really long time), the only policy action that will soon be left will be subsidising jobs and promoting work-sharing so as to close the output gap.
But, oh if only someone would listen. Judging by Krugman’s latest posting, the outspoken professor might just about be ready to give up:
From this day on, the official language of this blog will be Swedish.
Related links:
Krugman: ‘Back at you, Ferguson’ – FT Alphaville
Niall Ferguson fights back - FT Alphaville
Deflation dead and deader, Federal Reserve style – FT Alphaville