Paul Krugman: Fiscalists, Monetarists, Credibility, and Turf

Cardiff Garcia has a nice survey of the two main groups of stimulati — those who want policy makers to be doing much more in the way of fiscal expansion, and those who want much more in the way of monetary expansion. As he says, most (but not all) of the players here are, as a practical matter, OK with trying both, so in policy terms there isn’t much argument between them.

I’d just add two points.

First, my own evolution: in 1998, looking at Japan, I concluded that monetary policy could be effective, but only if — in what I guess is now a widely used phrase — the central bank could credibly commit to being irresponsible, that is, to allowing inflation to rise, not tightening money as soon as the economy recovered. When crisis struck more widely, it became clear to me just how hard this would be to achieve — in part because it would obviously take years to persuade central bankers that they needed a higher inflation target, and further time to convince investors that the central bankers really had changed their spots.

So I became a pragmatic fiscalist, for reasons best laid out by Mike Woodford: the great thing about fiscal stimulus is that it doesn’t depend on expectations, and it works even if nobody believes it will work.

Unfortunately, this pragmatic case for fiscal policy runs into a different real-world problem: the obduracy of policymakers, who quickly turned to austerity policies, reaching for any argument they could find. This has led me and others to spend a fair bit of time calling for monetary expansion, simply because the central bank retains some freedom of action.

Second, I’m surprised that Garcia doesn’t mention Richard Koo, who would seem to be the prime candidate on the fiscalist side for someone who is adamant that we not try monetary policy on the side. I’ve written about my puzzlement over Koo’s position.

The main thing, I think, is to recognize that while we have our differences, the important thing is to try everything that might help. The greatest intellectual sin here is to care more about protecting your turf — my answer is the only answer! — than about the real economy that desperately needs every form of help we can deliver.

Fiscalists, Monetarists, Credibility, and Turf –

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