Krugman’s blog, 11/11/15

There was one post yesterday, “Supply, Demand, and Neel Kashkari:”

So, if the Minneapolis Fed felt the need to maintain conservation of NK, they could have chosen to replace Narayana Kocherlakota with a New Keynesian. Instead, they chose Neel Kashkari. Brad DeLongisn’t happy, and this Twitter exchange suggests that he has good reason to worry.

I’ve written before about the all-too-common fallacy of confusing demand with supply, of arguing that because we had a bubble — so that some component of aggregate demand was unsustainable — the economy as a whole was somehow producing more than its potential. Let me just repeat what I said then:

Just a brief note: one thing that keeps appearing in comments is the notion that because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t “real” — that it was all a figment of our imagination.

This is confusing demand with supply.

We really did produce all the goods and services counted in GDP; we were able to do that because we had willing workers, a sufficient capital stock, the right technology, and so on.

What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand.

But now we are about to have a Fed president who says:

How’s this? Growth was artificially fast due to leveraging of econ. Trying to return to that rate thru def spend is futile.

In the words of Charlie Brown, AAUGH!

That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.

So, great: we now have a liquidationist in a senior position in the Fed system.

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