« Paging Dr Cerberus | Main | Pwogs and their dawgs »

Were Paul the king, it would be good... right?

By Owen Paine on Tuesday November 2, 2010 09:32 PM

More notes in a bottle from the Krugman watch: our Paul sez folks ask him all the time "Okay then, what would you do if you ran the Fed?"

Good question worth asking an econ-con bigfoot operating his mouth at any volume and speed. Our man of course has an answer.

"Announce a fairly high inflation target over an extended period, and commit to meeting that target [e.g.] achieve 5 percent annual inflation over the next 5 years — or, perhaps better, to hit a price level 28 percent higher at the end of 2015 than the level today.... Crucially, this target would have to be non-contingent — not something you’ll call off if the economy recovers. Why? Because the point is to move expectations, and that means locking in the price rise whatever happens."
Expectations management -- the voodoo way to recovery, here expected to step up aggregate demand by lowering the public's expected real rate of interest, in fact pulling it into negative territory for the first time since the 70's, and inducing changes in domestic spending by both corporations and households (This notion of PK's originally debut-ed here.)

I doubt the Krugman fed could make it happen since it lacks any for-sure driving mechanism. Lowering the interest rate would really trigger substantial increases in spending? No one has a clue how this works, even in the simpler mode of quantitative easing. No one really knows what would happen if the Fed bought say $3 trillion of outstanding debt in the next coupla quarters; and even if it went off as hoped by its boosters and reduced nominal rates, it's still unquestionably vastly inferior in effectiveness to a good old-fashioned Keynesian fiscal blowout.

But this fantasy wish of PK's does highlight one thing I like very very much indeed: price level management.

We really do need a way to manage the "price level" and of course the real way to do that -- the never-discussed way -- is the direct way, the Colander-Lerner-Vickrey way -- setting up a markup market that could easily enforce precisely the 28% price level increase in five years that PK suggests, or any other higher or lower price level, and get there in easy to swallow quarterly hops

A markup market operates just like any warrant system: the beauty of this one you can lift prices as well as restrain them, without guessing quarter to quarter what the target price level move requires in either a Pigou tax or subsidy to make happen. The trading market for warrants needed to legalize any specific violation of the target change in markup produces spontaneously the "correct" tax or subsidy

But any price level targeting -- even voodoo-style, a la PK -- has pathetic chances; as PK suggests, "no better than those of getting an adequate fiscal stimulus." Imagine the chance for the totalitarian Gosmart notion of a markup market hovering over the heads of corporate Amerika!

Comments (11)


I'm too lazy to look it up. How does a markup market work? Who has to buy one when they change a price? Who doesn't? Unions when they negotiate a new contract? Individuals when they get a raise?


warrents required for mark ups ??
would cover the dollar value added
by all firms
one firm at a time

restricting the requirement
just to firms
properly defined
would suffice in general
to control over all pricing changes

think value added tax
not a difficult system eh ??
ie that part of total selling price
by a value added tax

the part of any price that includes
wages salaries etc and profits interest etc
all other inputs are bought inputs
essentially some other corporation's value added

by the way one could alternatively
simply have a wage and salary warrent system it would work quite well too
so long as profits etc could be controled by inter firm competition
which they couldn't be of course



pk adds some graphs on picking a correct inflation rate ..one high enough to reach escape velocity
ie fast enough to pull us out of the liquidity trap ( what we're in now ..
where the fed pumping in mone money
can't trigger spending or lending


Krugman's argument is a great example of the limits of general equilibrium analysis and its fundamental incompatibility with old school Keynesianism. I've had the exact same argument with every Krug friendly semi-keynesian NKer.

1. Monetary policy won't work during a liquidity trap in principle
2. We can get out of this liquidity trap if we just use more aggressive monetary policy.

The whole thing relies on mixing up long run and short run equilibrium, and just assuming away the transition. They give absolutely no reason, whatsoever, why a 4% target would be in any way more credible than a 2% target, while at the same time arguing that monetary policy is not credible at all in an expectations trap. Suddenly pushing on a string just works, if you push a bit harder.

I've never -- and this is after speaking to recent Princeton Phd New Keynesians, the "best and the brightest" -- heard any remotely plausible explanation of how their expectation trap would be broken. They just assume that agents will take a long run view that full employment will be automatically achieved, that there simply will be full employment and inflation, and then they transpose it into the short run, even though they have already argued that we are stuck in a short run expectations trap with high unemployment equilibrium and disinflation.

The unmoved mover that breaks the trap is obviously fiscal policy. The fact of the matter is that if you want to appeal to good old Keynes, you have to ditch monetaphilic New Keynesianism. They are fundamentally incompatible.


oh, and I too would like to hear more about the MAP.


I don't understand why they don't call in the helicopters. That would work too. And they already call him "Helicopter Ben".



additional pk gibbering

on the fed generating inflation expectaions that liberate expectations
from their disinflation trap

his limping sum up

"The tricky part ....how does the Fed
commit itself now to not raising rates
in the future ...the Fed needs ....
a way to tie its own hands ...Not easy"

quite so paul
in fact without fiscal thrust
un do able
and the whole conjury is in lieu of fiscal thrust
so ....the project fails at conception



original pk popular rendition
expectational levitation

btw using a bit of typical
pre crisis macro think
seems to me
if most agents share the same model of the economy as the fed and believe full employment (5% unemployment)
is the known fed policy objective
and getting to full employment has a clear road ahead when inflation is so near zero
then rational expectations of these agents
would already assume
such a non policy rate response to the future return
of rising rates
of rising rates
of product prices

we're looking at the policy results right now

i love this wonderland think
its like time travel


the laff riot among
the skin apes
the helicopter drop produces is most revealing

its just a metaphor
for a random passing out of new money
or any random pattern
of new money distribution
which by its construction
will not impact future micro actions
of agents for expected micro consequences

changes in income here is like
winning a lottery
pure luck payments leave agents
to pursue the course of future action
no differently then they would pursue
that course otherwise
ie if macro conditions
produced by the new money lottery
occured by spontaneous internal action
of the system of existing agents

the only change would be in macro expectations if such a lottery became regular fed practice


The worst part in that post was this:

"Eventually something will come along — a technology-driven investment boom, a recovery of consumer spending as debt gets paid down, whatever."

WHATEVER??? Fuck, why didn't I think of that as a solution to 10% unemployment? Y'know, employment just kind of recovers at some point in the future (how? when? after a 20 year depression? "whatever"), then we have to promise higher inflation after that, and then that magically causes employment to recover now. Genius!

"The ocean will be flat once the storm passes, and therefore, through the power of rational expectations, it must be flat now! Er, but we still need the fed to change its targets for some reason or other, because, uh, people don't think that the ocean will be flat enough after the storm, or something, and that's why it's still stormy, you see?" *PK rips another hit from the gravity bong* "Yeah, that's the ticket, maaaan."

Christ on a bike. Prof. Krugman, please turn in your Keynesian Club Card. That's exactly what I was referring to with the 'assuming away the transition' bit. I almost want to thank him for making the absurd weakness of his theory so obvious.

This really does go back to his shitty voodoo thesis about Japan that he just doesn't want to abandon in the face of the evidence. That's really what this is about: admitting that he wrote a whole book based on a just-plain-stupid idea. And he's read Koo, so he has to be aware that he was and is wrong about Japan. Complete inability to admit error is quite clearly the tragic flaw of our hero PK.

Post a comment

Note also that comments with three or more links may be held for "moderation" -- a strange term to apply to the ghost in this blog's machine. Seems to be a hard-coded limitation of the blog software, unfortunately.


This page contains a single entry from the blog posted on Tuesday November 2, 2010 09:32 PM.

The previous post in this blog was Paging Dr Cerberus.

The next post in this blog is Pwogs and their dawgs.

Many more can be found on the main index page or by looking through the archives.

Creative Commons License

This weblog is licensed under a Creative Commons License.
Powered by
Movable Type 3.31