Monday, June 11, 2012

Shoulda criticized Krugman when I had the chance... but this is a good post

Lately Krugman's been doing a lot of comparisons between Obama and Reagan, and calling Reagan a Keynesian (fair enough I think - and this isn't the first time the point has been made). That's all well and good but one of the thing's that can go wrong with talking like this is that you risk communicating "if only Obama did what Reagan did we'd all be fine". The point is that in the early 1980s (as in the early 1920s), the Fed deliberately engineered a sharp recession to deal with an inflation problem. There were also lots of supply side factors in play in both cases. We never lost traction with monetary policy (this was pre-Great Moderation with high nominal rates so there really aren't any obvious problems in what I've taken to calling the "interest rate channel" or the "expectations channel"). Whether they were right or wrong or took it too far is something we can argue about, but it's a very different sort of problem than the demand problem we're dealing with now. Now there are legitimate concerns about demand because balance sheets have been decimate and their's uncertainty about the global environment. We also just came through a big asset bubble which is going to make people more circumspect in forming their expectations of returns today.

So I've been meaning to weigh in and say that about Krugman's casual comparisons between Obama and Reagan, but things have been busy. Now he beat me to the punch and I'm agreeing with Krugman rather than scolding him (not ideal... I like to scold him when I have a mind to scold him so I have scolds to link to when I get scolded for allegedly defending everything he says).

Here's the modern Bastiat himself on the subject:

"A number of people have asked me to respond to this Hubbard-Gramm piece on the Reagan recovery versus the Obama recovery, and why it proves that right-wing economics roolz.

But I already did respond. When? In February 2008 — back when people like Hubbard and Gramm were denying that there was any recession at all. In fact, as late as July 2008 Gramm declared that all we had was a “mental recession”, and that America had become a “nation of whiners”.

So, more than four years ago I predicted a very slow recovery. Why? Because recessions like those of 1990-91, 2001, and 2007-2009 have very different origins from recessions like 1974-75 or the double-dip recession of 1979-82. The old recessions were more or less deliberately created by the Fed via tight money to control inflation, which meant that you had a V-shaped recovery once the Fed decided that we had suffered enough and loosened the reins. The new recessions all reflected private-sector overreach, which is much harder to make up for.

Note that while I predicted a slow recovery way back when, it has been even slower than I expected. But that’s no mystery; at that point neither I nor anyone else knew just how far the private sector had overreached, plus I didn’t expect the unprecedented fiscal austerity that has been such a drag on recovery given the fact that we’re in a liquidity trap."


  1. Is there a difference between "private sector overreach" and "malinvestment"?

  2. Desolation JonesJune 11, 2012 at 5:23 PM

    I think Krugman is just trying to be snarky with Reagan and Obama comparisons and isn't setting out prove anything. I'm sure he think monetary policy was the entire story in the Reagan recession/recovery, but he brings up the deficits/spending just to make fun of the republicans that worship Reagan. I think he's being mostly sarcastic when he calls Reagan a Keynsian seeing how modern Keynesians don't believe in fiscal stimulus when not in the zero bound. The problem with Krugman's Reagan mocking is that it might come off as if he's saying the deficits from Reagan prove something about the current recession, which it doesn't.

  3. "Lately Krugman's been doing a lot of comparisons between Obama and Reagan, and calling Reagan a Keynesian (fair enough I think - and this isn't the first time the point has been made). "

    Something Krugman and seem to agree upon.

  4. Haha, the "modern Bastiat" is the guy who thinks an erroneous suspicion of an alien invasion will make everything hunky-dory. Maybe I shouldn't be an economist; I don't have the stomach for this nonsense.


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