Okay, so I read all of Rob's links concerning Krugman framing his liquidity trap/fiscal stimulus story. And Rob is right, he does frame the argument quite well. It seems I was speaking more out of my own incoherence than Krugman's failure to convey his ideas clearly.
So I propose we drop Murphy as I don't think he adds anything to the discussion (I regret the post) and ignore tax policy (at least for the time being) so we can focus on Krugman's deficit argument.
As I understand it, Krugman's premise is we are in a liquidity trap (interest rates = 0) so monetary policy is a gun without ammunition and fiscal policy needs to step in to make up for what the Fed and private sector can't/won't do. This can be done through tax cuts or increased spending. This is viewed as a short-term issue so it is assumed the deficit can be paid off in the long-run without signifcant inflationary costs. Also, tax cuts will be saved instead of used for investment or saving, and thus government must step in to do the spending. Ala, deficit spending is the best remedy for our current woes.
Rob, is this correct? I don't want to go any further unless I have basics of the story down.
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Sounds consistant with Krugman's story to me. I'd only add that while Krugman is viewing the recession as a short run issue, he also believes we won't break even for years to come at the current pathetic growth rates, which are likely to get worse once stimulus runs out. The recession only lasted a year and a half, but the recovery is likely to be pretty painful and stretch for much longer.
ReplyDeleteAlso sorry if was and ass in those comments. I just got a little fired up.
ReplyDeleteNot at all; you were right to call me out for not doing enough research.
ReplyDeleteThis story makes a lot of sense intuitively. I think ultimately and unfortunately you and I will be arguing the merits of theory and ideas rather than absolute truth as this story will not unfold for a long, long time and using data at this point, at least in my opinion, probably does more harm than good.
My next post will probably focus on why I think it is a mistake to compare this whole mess (the crisis/Fed response/fiscal policy) to that of the GD.
And just a minor note, I meant to write "consuming", not "saving", in the second-to-last-sentence of my summary of Krugman's argument.