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Krugman on Krugman

Paul Krugman, annoyed by an offhand caricature from economist Ed Phelps, pens a quick refresher on the thinking of modern Keynesians:

Fiscal stimulus is necessary only under certain special conditions. Namely, when you’re up against the zero lower bound, and conventional monetary policy is useless, fiscal stimulus may be your best option.

And we are at the zero lower bound right now, for the first time in 70 years. That’s why fiscal stimulus is on the agenda — not because Keynesians believe that deficit spending is always and everywhere the best policy.

The "zero bound" means that the central bank (in our case, the Federal Reserve) has lowered its key interest rate to near zero, and thus can no longer stimulate demand by lowering interest rates. At that point, monetary policy loses its power and fiscal policy -- the government, or in the case of "quantitative easing," the central bank, spending money to create demand directly -- comes into play. And this graph suggests that it's been working, or at least helping:

two crises.png

We began with an economic crisis that looked a lot like the Great Depression. But due in large part to the massive efforts of the Federal Reserve and the government, we pulled out of it, or seem to have pulled out of it.

By Ezra Klein  |  November 4, 2009; 4:09 PM ET
Categories:  Economic Policy  
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All previous recesssions, regardless of policy response, have come to an end. This one was always going to end, too. It's impossible to know to what extent any of the many steps taken by the Obama and Bush administrations and the Fed have contributed to or detracted from the recovery. Obama is trying to duck responsibility for the recession and the swelling deficit and debt and claim credit for the recovery. That's not surprising, perhaps - but neither is the change I can believe in.

Posted by: tbass1 | November 4, 2009 4:34 PM | Report abuse

I find it somewhat discrediting to the whole field of economics that two Nobel laureates can't agree on basic concepts like this. It's like two doctors disagreeing on whether a virus causes the flu. But be that as it may, I agree with Krugman.

Posted by: bmull | November 4, 2009 4:36 PM | Report abuse

Conflating quantitative easing, which *is* monetary policy and which operates immediately, and stimulus, which is fiscal policy and which ramps up over a period of years, is nonsensical. Ezra needs to learn what these terms actually mean before casually throwing them around.

Posted by: tomtildrum | November 4, 2009 5:23 PM | Report abuse

Nice graph. What's it measure? Where's it from?

For a minute there, I had to check to make sure this wasn't Yglesias' blog.

Posted by: Klug | November 4, 2009 8:19 PM | Report abuse

Krugman's comment is reasonable, but the graph is totally irrelevant. The Other Group of Economists also felt that the economy would rebound in this time frame. No way to tell who was right.
Greg Mankiw pointed out yesterday that he and others have been saying for a while that there is no metric available to know how much the stimulus has helped.

Posted by: MikeR4 | November 5, 2009 10:29 AM | Report abuse

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