Monday, February 6, 2012
Posted by dkuehn at 8:39 PM
At several points I've talked about how the point of monetary and fiscal policy's job is to end the distortion of market allocation caused by the liquidity trap - that it is in the depression that market signals are distorted.
Brad DeLong is one of the few bloggers to agree with me explicitly on this point.
Now it looks like Krugman is using the same sort of reasoning when he talks about the liquidity trap as a price floor. That's exactly what it is.
My one quibble with Krugman's post is this line: "But free-market oriented economists, of all people, should understand that you can’t just decree higher returns without paying a price in economic disruption."
We are free market economists, Paul. You, me, Brad DeLong, Karl Smith, Christina Romer. Matt Yglesias is a free market commentator on these issues. David Glasner, Scott Sumner, and Milton Friedman are free market economists with a lot of good thinking in common. Don't give up that term - don't dissociate yourself from it. We think what we do because we understand the efficiency and the progress implicit in a market economy. Maybe the austerians that disagree with us are free market economists too - I'm willing to grant that. But they are free market economists who are wrong and we are free market economists who are right on this. If we said the government had to plan allocation for things to be efficient, then we would not be free market economists. But that's not what we've said and we should never give up this ground.
Before I've used the analogy of a little kid with a hammer running around and banging in screws with his hammer. You don't look at that kid and say "wow he has a deep appreciation for hammers - look at how confidently he resorts to the use of his hammer to solve his problems". You don't say that to a kid - you teach the kid how to use the right tool for the right job and you teach him why it's not respecting the hammer to use it on every problem he comes across. It's the same with austerians. Just because they cite markets marginally more than we do doesn't mean they respect free markets more than we do.
I refuse to cede that ground.
And understanding that market signals are being distorted right now is critical to understanding why we should refuse to cede that ground.