Scott Sumner  

Brad DeLong on the "sell by date" of Krugmanomics

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I recently argued that Krugmanomics would become instantly obsolete the moment the Fed raises interest rates (a date that seems to be steadily receding into the future, although still expected this year.) A new post by Noah Smith suggests that Brad DeLong thinks this will occur quite soon:

University of California-Berkeley economist Brad DeLong does some quick back-of-the-envelope calculations, and estimates that the TPP would increase the world's wealth by a total of $3 trillion. Though that's not a big deal in the grand scheme of things, it's one of the best reforms that's feasible in the current polarized political situation. DeLong dismisses Baker's idea that the TPP would lead to demand leaking out of the U.S., pointing out that interest rates won't stay at or near zero much longer.
When I went to the link, however, I could find no support for Smith's claim. I read DeLong's post three times, and still found no support.

DeLong does hint, or perhaps imply, that if interest rates were to rise in the future then the zero bound model would no longer be applicable. Note that Paul Krugman frequently argued that the zero bound model applied to the eurozone in the period after early 2009, despite the fact that eurozone interest rates were not at the zero bound during 2009-2012.

I don't have a view on the TPP, although I'll probably support it once it's negotiated. However I do agree with Paul Krugman's criticism of the US negotiating position on intellectual property rights, which if enacted would increase global economic inequality. Of course Obama has the opposite view from us ivory tower academics. Egalitarianism is OK in theory, but when big money gets entwined with the national interest, high-minded ideals seem to fall by the wayside.


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COMMENTS (5 to date)
E. Harding writes:

"but when big money gets entwined with the national interest, high-minded ideals seem to fall by the wayside."
-Personal interest, too. Google and Microsoft were big Obama funders back in the day. It would only be logical to reward their support with favorable policies.
"despite the fact that eurozone interest rates were not at the zero bound during 2009-2012."
-I think Krugman's argument is that, though EZ rates might not have been at the zero lower bound in 2009-12, they were close enough to the ZLB that lowering them further would not make much of a difference. Lowering the Federal Funds rate by as much as 5 percentage points in 2007-8, for example, still didn't prevent the coming of a deflationary recession.

Scott Sumner writes:

E. Harding, Yes, that might be Krugman's argument, but it turns out it's completely irrelevant, even if true. As long as rates are positive, monetary offset would completely negate any additional stimulus.

Scott, since zero is apparently not the true lower bound, would you say that Europe has not been at the lower bound - never even mind forward guidance or QE etc. - until 2015, and that the US has never really been at the real lower bound ever, even now?

Also: "the US negotiating position on intellectual property rights... if enacted would increase global economic inequality... but when big money gets entwined with the national interest, high-minded ideals seem to fall by the wayside."

Actually Democrats don't really care much about global inequality, not even ostensibly. They treat inequality as a 99.9% domestic issue - and that 0.1% piece that's international is just Paul Krugman writing about the Israeli Gini coefficient earlier this week. They've painted themselves into a corner on this because A) International inequality is much more dramatic than American domestic inequality; B) Even most of the poorest Americans qualify as being rich or middle class by the standards of genuinely poor countries; and C) Despite A), global inequality has shrunk massively since the 1990s. Admitting A B and C would suck the air right out of the story they've built up over the last couple of years about inequality: that it's a Deathly Serious American Issue, that it's gotten much worse (not better) since the 1970s, and so we need to find clever ways to tax rich Americans so we can give more stuff to poor Americans.' Hence they hardly even *pretend* to care about global inequality.

Herbert writes:

"despite the fact that eurozone interest rates were not at the zero bound during 2009-2012."

Arguably, effective interest rates in several eurozone countries were not near the zero bound even after 2012 since monetary policy transmission was disrupted in countries like Greece, Portugal, Italy and Spain and effective monetary conditions remained very tight, i.e. real-world interest rates for borrowers much higher than zero-bound.

Scott Sumner writes:

Jacob, I agree on inequality.

Jacob and Herbert. The zero bound question is rather hard to pin down. It may depend on the way the concept is being used. I agree that the eurozone was not at the zero bound in 2013 and at least part of 2014, as they continued to cut rates. There is a sense in which that is also true of the US, but a sense in which it is not applicable to the US. The Fed could have cut rates lower, but unlike the ECB showed itself unwilling to do so. So perhaps we were at the lower bound of the Fed's willingness to cut rates.

I used 2009-12 to be conservative, but I agree that for the eurozone I could have added 2013 and at least part of 2014.

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