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http://krugman.blogs.nytimes.com/
From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you’re in a liquidity trap.
In particular, the whole case for fiscal stimulus and against austerity
rests on the proposition that with interest rates up against the zero
lower bound, the central bank can neither achieve full employment on its
own nor offset the contractionary effect of spending cuts or tax hikes.
This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept.
Thus, Ryan Avent is driven to distraction by Tyler Cowen suggesting that it’s OK to have austerity now because growth in the third quarter was fairly strong. As Ryan says, the right time for austerity is when “the economy is on the way to putting the zero lower bound well in its rear-view mirror” — that is, when we’re well out of the liquidity trap. Meanwhile, Brad DeLong is driven into shrillness by Alberto Alesina still, after all these years, writing as if there’s no difference between spending cuts in normal times and spending cuts when you’re up against the zero lower bound.
We’re not talking about stupid people here; clearly, there’s something about the notion that the rules for policy depend on the situation that some economists just don’t want to understand.
Anyway, my own answer is still what it has been all along: the time for austerity is when the economy is close enough to full employment that the Fed is starting to raise rates to head off an undesirably high rate of inflation; at this point, given the case for somewhat higher inflation, I’d say that we shouldn’t even think about this until unemployment is well below 7 and falling fast. At that point you can, in effect, make a deal — fiscal austerity in return for not hiking rates — that leaves the economy harmless.
I can understand why politicians have a hard time getting this. But economists have no excuse.
This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept.
Thus, Ryan Avent is driven to distraction by Tyler Cowen suggesting that it’s OK to have austerity now because growth in the third quarter was fairly strong. As Ryan says, the right time for austerity is when “the economy is on the way to putting the zero lower bound well in its rear-view mirror” — that is, when we’re well out of the liquidity trap. Meanwhile, Brad DeLong is driven into shrillness by Alberto Alesina still, after all these years, writing as if there’s no difference between spending cuts in normal times and spending cuts when you’re up against the zero lower bound.
We’re not talking about stupid people here; clearly, there’s something about the notion that the rules for policy depend on the situation that some economists just don’t want to understand.
Anyway, my own answer is still what it has been all along: the time for austerity is when the economy is close enough to full employment that the Fed is starting to raise rates to head off an undesirably high rate of inflation; at this point, given the case for somewhat higher inflation, I’d say that we shouldn’t even think about this until unemployment is well below 7 and falling fast. At that point you can, in effect, make a deal — fiscal austerity in return for not hiking rates — that leaves the economy harmless.
I can understand why politicians have a hard time getting this. But economists have no excuse.
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