Saturday, August 8, 2015

Trying to describe what the problem is


A vague recollection of something Paul Krugman said led me to a CEPR post from January of 2014:
Paul Krugman is a very smart person who does a fine job of defending himself. But he has enough detractors who repeat the same nonsense enough times that some reasonable people may actually be deceived.

For this reason, I will briefly intervene to point out that the people claiming Krugman called on Greenspan to create a housing bubble in 2002, like Bret Stephens in the Wall Street Journal today, are just making stuff up.

The basis for this absurd claim was a 2002 column on the weak recovery following the 2001 recession. The column notes the weakness of the economy at the time (we were still losing jobs 8 months after the official end of the recession) and attributes it to the fact that the 2001 recession was not a standard post-war recession. It was brought about by the collapse of the stock bubble.

Krugman then wrote:

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

It should have been pretty evident that this was sarcastic ...

I wouldn't say Krugman was being sarcastic. I think he was trying to describe what the problem is: We don't get growth these days unless we get a bubble. It's a pretty straightforward observation on his part. It wasn't even his observation, actually. It was McCulley's.

The reason this comes up is that I said something similar a while back, and just came upon it now. In Reduction (3) I quoted me:

The problem is not that we have inflation. The problem is not that economic growth is weak. The problem is that we need an inflationary increase in the money in order to get decent growth. Since we have chosen to keep inflation at a low level, we are limited to a low level of economic growth. This problem cannot be solved by thinking of inflation and growth as two separate problems.

I still use the word "inflation" as though I was still in the 1970s. Forget about that. If you take what I said and change the word "inflation" to "bubble" you get pretty much exactly what Paul Krugman said:

The problem is not that we have bubbles. The problem is not that economic growth is weak. The problem is that we need a bubble in order to get decent growth.

A bubble, of course, is inflation: asset inflation that ends in a crash. So Krugman and I are not very far apart on this. And because economy-wide inflation has been quashed by policy since Carter appointed Volcker, the only way inflation can really get rolling is in the form of a bubble.

1 comment:

Auburn Parks said...

I'm not sure what the problem you're describing is Art. The economy will always be cyclical, thats not a problem. Are you saying the problem is too much private debt? Well thats true, but thats just a result of low incomes, cant keep pending without debt if your income doesnt increase. Never did quite understand what you think the problem is/