Krugman’s blog, 12/7/15

There were two posts yesterday.  The first was “That 30s Show:”

A few years ago de Bromhead, Eichengreen, and O’Rourke looked at the determinants of right-wing extremism in the 1930s. They found that economic factors mattered a lot; specifically,

what mattered was not the current growth of the economy but cumulative growth or, more to the point, the depth of the cumulative recession. One year of contraction was not enough to significantly boost extremism, in other words, but a depression that persisted for years was.

How’s Europe doing on that basis?

Maddison Project, Europa

And now the National Front has scored a first-place finish in regional elections, and will probably take a couple of regions in the second round. Economics isn’t the only factor; immigration, refugees, and terrorism play into the mix. But Europe’s underperformance is slowly eroding the legitimacy, not just of the European project, but of the open society itself.

Yesterday’s second post was “The Passive-Aggressive Monetary Two-Step:”

Ted Cruz somewhat surprised Janet Yellen by accusing the Fed of causing the Great Recession by tightening monetary policy in 2008; David Beckworth sort-of-kind-of supports Cruz by arguing that the Fed did in fact “passively” tighten by failing to do enough to offset falling spending.

Uh-oh: it’s starting to look a bit like the Friedman two-step, only this time done at internet speed.

By the Friedman two-step, I mean the process of argument that began with Friedman and Schwartz on the Great Depression, in which they argued that the Fed could have prevented the Depression by aggressively expanding the monetary base to prevent a sharp fall in broader monetary aggregates. This was a defensible argument, although it looks much weaker in the light of more recent developments; as I warned in 1998, in a liquidity trap the central bank loses control of monetary aggregates as well as the real economy; it’s by no means clear that the Fed really could have prevented the Depression. Still, that remains a live argument.

But what happened over time — and Friedman himself was very culpable — was that the claim “the Fed could have prevented the depression” turned into “the Fed caused the depression.” See? Government is the root of all evil! Friedman used this to push his patented agenda of laissez-faire on everything except monetary policy, where under the guise of M2 targeting he was actually calling for a very active Fed.

The thing is that even if that would have worked (which it probably wouldn’t), it was inevitable that others would go the whole way and call for laissez-faire all the way, including monetary policy. I mean, who needs the Fed when everyone knows it caused the Great Depression. Back to the gold standard!

The path from Friedman and Schwartz to goldbuggism took several decades. But things move faster these days.

When Ted Cruz uses the passive-aggressive method to attack the Fed, claiming that it caused the Great Recession because it didn’t do more in 2008, he isn’t using it to push the cause of market monetarism. He is already on record as an ardent supporter of a return to gold. Needless to say, a gold standard would have meant much tighter, not looser, monetary policy since 2008. But Cruz uses the framing of failure to act as acting in the wrong direction to obscure this point.

The question of whether inadequate policy should be viewed as tightening may seem like a fun word game. But you really don’t want to provide, um, passive support to policy ideas that would make things much worse.



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