Monday, August 18, 2014

SECULAR STAGNATION - comment on something Krugman said


I've been reading Krugman's chapter in Vox EU's secular stagnation book, because economists who aren't Krugman are probably wrong and I wanted to cut to the quick.

I found the below statement by him to be interesting, so I'll quote it here and hopefully I won't get sued or anything:

The most persuasive story about how monetary policy can work at the zero lower bound is that it can gain traction if you can convince the public that there has been a regime change, that the central bank will maintain expansionary monetary policy even after the economy recovers, in order to generate high demand and some inflation. As I put it a long time ago (Krugman 1998), the central bank must “credibly promise to be irresponsible”. But if we are talking about Japan, exactly when do we imagine that this period of high demand, when the zero lower bound is no longer binding, is going to begin?

And now we are talking seriously about secular stagnation in Europe and the US as well, which means that it could be a very long time before ‘normal’ monetary policy resumes. Now, even in this case you can get traction if you can credibly promise higher inflation, which reduces real interest rates. But what does it take to credibly promise inflation? It has to involve a strong element of self-fulfilling prophecy: people have to believe in higher inflation, which produces an economic boom, which yields the promised inflation. A necessary (though not sufficient) condition for this to work is that the promised inflation be high enough that it will indeed produce an economic boom if people believe the promise will be kept. If it is not high enough, then the actual rate of inflation will fall short of the promise even if people do believe in the promise, which means that they will stop believing after a while, and the whole effort will fail.

I find the bolded bit interesting because, as the Krugginator himself likes reminding us, there is a large and strident section of the US population whose heads assplode in a firestorm of wharrgarbl whenever you suggest that there is inflation around the corner.

Basically, "credibly promising inflation" in the US has the added difficulty of coming up against the entrenched rentier class' hatred of inflation. Show them coming inflation and they're going to puke stocks and buy gold; they're not going to contribute to an economic boom, they're going to strangle it.

Shit, if Yellen promises them enough inflation they'll probably get their ignorant puppets in the Randroid Objectivist party to impeach her. Or something. Because America.

I'm sure he's thought of this sociological complication.

I just thought it was neat because it's economics coming up against the obstacle of sociology, and that means sociology is superior to economics which is something I like to say to economists to piss them off.


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